Is this the year of the Covid Shutdown or the year of the Robinhood Tech Rally?
Edit: This post first appeared on https://thegratefulcollective.substack.com/ on 27 Sept. As time has passed, it still makes sense, and now that the stock markets are heading towards returning to the March levels, it makes it more apt.
The world’s global Covid-19 horrors started in January this year, or maybe March, depending where in the world you were. By April, it became quite clear and the whole world was reeling from the Covid-19 impact.
Now that we are in September, the song that comes to mind is Wake Me up When September ends In September.
Summer has come and passed The innocent can never last Wake me up when September ends Like my fathers come to pass Seven years has gone so fast Wake me up when September ends
In this period, we saw capital market values lost 7 years in a blink, and it will take 1-2 more years to recover. We also stopped travelling, stopped entertaining, and stopped partying - in person.
However, there are really 2 versions of this market story- and in a way, it is divided by generations. The investors who were invested and saw their values crash and possibly bounce back up, and then the new generation of “Robinhood” punters who bought into the crash fearlessly, akin to the bitcoin millionaires of 2018 (how historic that now seems).
1) Version 1: The Robinhood (kinda Tech Stocks) Rally
If you know what is Robinhood , Gemini and Stonks, then you are probably of the generation where you managed to grab the Tech Rally unencumbered - with no fear and full of hopes. A world where Tesla stock sent people to the moon, and not just, well a Tesla in a shuttle.
As a sign of old age, I went overweight in Tech on my portfolio since 2018, and it did well, but nothing like the Robinhood millionaire heros.
To be clear, the tech rally is based on the idea that the new world order will have little human connection and technology is all that will connect us. The Robinhood traders merely exacerbated this bubble rally. Granted that not everybody agrees it is a tech bubble.
The mark of a bubble is when valuations far exceed the acceptable earning potential of the stock in question. In trading psychology, a bubble happens when a significant proportion of stock holders are expecting returns in a consecutively shorter time frame (i.e. trigger happy to sell); a precipitating event would then trigger that sell-off.
Now the big question is: will the tech rally continue into the rest of 2020?
Let’s start with the NASDAQ half time snapshot:
The NASDAQ looks like it is turning down, or at the very least taking a pause. It is important to note that a majority of Indices globally are now controlled by their Top 20 holdings (or less in some cases).
Unfortunately, this makes an index like NASDAQ less relevant, as power and means are now captured within the biggest tech names.
When we assess technology companies: we look at its capacity to capture new business and monetise it, beyond the current Covid environment. When people return to meeting face to face, what are the services and transactions that will still happen? How much of that has been captured in the current stock prices?
For example, in a post Covid world, will Zoom (Nasdaq:ZM) be able to withstand the re-energised onslaught of the free services by mega players (Meet, Teams) or the professional players like Cisco Webex?
What am I looking for the second half in Tech?
I would look to history and expect the weak hands to be shaken off in the last quarter of 2020 or Q1 2021. Every rapid rise in the stock markets, is accompanied by a sharp pullback for “unexpected” reasons. However, that also means I want to be ready with my shortlist of stocks to capture it at any moment; when they are priced at the right value.
The wildcard here would be the US Presidential Elections, and/or any sudden change in the Covid-19 situation.
2020 is the year of the Decade that could make a difference to your portfolio. This could very well be the opportunity of the Decade. Not to be superfluous, but rather stating that a high volatility event like this could be followed by multi year low volatility or range bound markets.
Version 2: The Singapore Consumption Based Stock Market
Images are not in same scale. The (?) mark identify stage 2 of the consolidation/ fall further zone.
The Singapore market is a more broad based market with fewer technology stocks, and driven by the Banks and REITs counters.
Obviously, we know that the biggest plague for REITS now is “human traffic”: whether it be hotel occupancy, retail footfall or industrial activity. However, after the initial shock period, the new normal is now setting in with more activity at the retail, office and hospitality properties.
Banks have been going through the low interest rate phase, and the good news is that interest rates do cycle. Furthermore, Singapore banks are well capitalised, resilient, earning regionally and digitally invested. This puts them in a great position to capture any NIM (Net Interest Margin) improvement.
During this period, the Singapore Index ETF would be a relatively blunt tool as it will be impacted by broad based weakness, but struggle to fully capture sector outperformance. We know that exiting this Covid situation will be a sector led process. That said, it would be unwise to change a strategy that you are familiar with. So if you are buying indices on a monthly investment plan, then you should carry on and maybe add on specific counters that make sense to you.
What am I looking for the second half in the Singapore Market?
At a Singapore market level, the two charts above would give me pause if I want to be overweight Singapore at this moment (i.e. all my available cash). Nonetheless, I would still buy selectively, and wait for the market to unfold itself. My preference is quality Reits and to accumulate the local Banks with an eye to hold out for the next 3-5 years.
During this period, it is always good to buy at the individual stock level, so that you can be happy with that purchase even if the markets move against you.
I know many market speculators and commentators are commenting that March 23 was the best time to buy, but thats because (for now) the market flipped back up. There is nothing to say that it is a certainty that there will not be another hole through the ground.
I am happy to lose a few percentage points of extra profit to have more certainty to take bigger positions. For me, the next 8 weeks would give a clearer picture.
Disclaimer: I write as a hobby on topics that I find useful to have a voice on. Nothing here represents the opinions of current or past employers, nor product recommendations or financial advisory in any form. I hope you find the writing useful.