As always, we begin this month’s newsletter with a recap of the last month, and considering how short it is, February was an action-packed month!
Since the March 2020 COVID market lows, it’s seemed that all the stock market did was go up and up! For those of us who have been investing longer than twelve months, our experience reminds us that unfortunately it’s not the case. Upward movements in markets are not a perfect straight line and undoubtedly we run into short periods of heightened volatility. Investor jargon for these uncomfortable periods include adjectives like Choppy, Check-Back, Pull-Back, Tantrum, Pause and the oh so feared word “Correction”.
Here’s a few of the main themes that have contributed to the recent late month “Pause” in markets. Firstly, the calendar may have played a role as February is historically a weak month for stocks and unluckily for February it follows the beloved “January effect” which in contrast historically provides stronger returns.
Secondly and much more importantly, the market is taking note of rising bond yields. 10-year Treasury yields started February at approx. 1.07% and ended at approx. 1.40%, which looks small but in relative terms is a huge move. Although this is a bullish sign for the economy it brings fears of future heightened inflation, which in turn could lead to potential interest rate increases which would cause short-term volatility for both stock and bond. March could see long end rates continue to rise on the back of improving economic data. Not to sound like a broken record, but the majority of bonds aren’t worth holding from a risk return prospective. I believe it’s time investors rethink the traditional 60/40 “balanced” type portfolio mix if they already haven’t done so already.
Around the world different governments are drawing up different stimulus packages to help recover after the COVID-19 pandemic. In the US, The House of Representatives passed President Biden’s $1.9 trillion stimulus package, which will move forward for debate and deal-making in the Senate. It already seems that the controversial $15/hr minimum wage will be left out of any Senate bill. Democrats who have a razor thin majority in the Senate will opt to try to pass Biden’s stimulus plan through budget reconciliation. Reconciliation allows a party to pass a bill with a simple majority vote.
Whatever the final bill ends up looking like, we all know that it will provide an instant “shot in the arm” to the economy. Data from Bureau of Economic Analysis (BEA) shows the first round of $600 government stimulus checks provided a 2.4% in personal spending. We can easily predict the upcoming shopping spree that an additional $1400 stimulus check will provide. Don’t get me wrong, I’m well aware of the agreement of how this is adding to the deficit and increases the potential for future tax increases, but I’ll leave that debate for another article. As for the here and now, let’s embrace the Biden helicopter money being dropped from the sky.
Key takeaways to consider given a backdrop of global stimulus;
● Increased consumer sp
● Massive Infrastructur
● Commodity Bull Market – Supply/demand restraints will lead to higher prices
● Cyclical Value recovery will out-perform Growth for the foreseeable future
March marks the one-year anniversary of the market lows caused by the COVID crises. It’s worth congratulating all those investors who took advantage. You overcame that uncomfortable feeling and bought because it was the right thing to do, even though it isn’t the easiest at the time by any means. Here are a few quotes I shamelessly used with clients and friends during those dark months;
“A Crisis is a terrible thing to waste” Paul Romer, Economist, Stanford University
“In the midst of every crisis lies great opportunity” Albert Einstein
“When written in Chinese, the word crisis is composed of two characters — one represents danger, and the other represents opportunity” John F. Kennedy
Unfortunately for us investors this will not be our last crisis, so go ahead and jot these down, they’ll come in useful.
After every market bottom comes a “Recovery”, this period usually involves a broad market rally. Which is equivalent to the saying “a rising tide lifts all ships”. This my friends is what I refer to as the “Easy Money”, unless you’re the unluckiest person in the world you should have been able to make some sort of profit during this phase. Regrettably, in my humble opinion the vast majority of this phase is now over, trust me I’m disappointed too! But don’t worry, it doesn’t mean the party is over. Stocks are still a great investment and arguably one of the best vehicles for wealth creation. You’ll just have to be pickier on what stocks you’re buying and understand the fundamentals behind those companies. Fundamentals are making a comeback like the “GOAT” Tom Brady and those who do their homework will be greatly rewarded.
Over the course of the last month, I have received a number of emails, and one of the common themes being asked was what different bits of jargon meant. Last month I covered the exciting ETFs that I have in the pipeline, so in the spirit of making everything clear, I am going to jargon bust some common acronyms and abbreviations.
ETF – This stands for ‘Exchange Traded Fund’ and is an instrument that holds an underlying portfolio of investment instruments and is bought and sold on stock exchanges. You may have encountered common ETFs that contain the largest tech companies, or the S&P 500 as a whole. Specialised ETFs like the ones I am involved in target stocks that are in specific industries (i.e. space tech industry).
SPAC – Special Purpose Acquisition Company. Essentially a SPAC is a special purpose acquisition company, also known as a “blank check company”. It is a shell corporation listed on a stock exchange with the purpose of acquiring a private company, thus making it public without going through the traditional initial public offering process. One popular example would be Diamond Eagle Acquisition Corp. which was set up in 2019 and went public as a SPAC that December. It then announced a merger with DraftKings the gambling platform. DraftKings began trading as a public company when the deal closed in last April under the ticker DKNG.
IPO – Initial Public Offering. This is when a private company goes public, making their shares available to the public. An IPO is underwritten by one or more investment banks, who also arrange for the shares to be listed on one or more stock exchanges
FANG – If you cast your eyes back to the ETFs section, you will notice I mentioned a common ETF is the big US tech companies. FANG is exactly that, the four big tech companies Facebook, Amazon, Netflix and Google. That doesn’t mean that you will find an ETF with just those four stocks, but there are a few ETFs that have these stocks among others. FANG simply refers to these four stocks together.
ESG – Environment, Social and Governance. As you may have already guessed from my newsletter, there is a lot that goes on behind the scenes when I evaluate a stock. ESG investing is a method of investing that looks at a company’s approach to the environment, social causes and how the company is run. This approach is mainly used by investors looking to invest in ethical stocks, or ones that fit their personal ideology.
It isn’t a replacement for traditional company evaluation and should be considered an additional step that an investor might take if they are concerned by a company’s behaviour. For example, ESG investors are very unlikely to invest in tobacco companies, regardless of how profitable they are.
As promised in my previous newsletters, I’m highlighting a private equity opportunity that aligns with my core principles of wealth creation. This particular private company comes Via Portland Holdings and billionaire investor Michael Lee-Chin’s global network. Investors once again have access to co-invest indirectly in ITM Isotopen Technologien München AG (“ITM”), a privately held medical radioisotope supplier and oncology drug developer headquartered in Germany.
Since its foundation in 2004, ITM’s main goal has been to significantly improve the treatment outcome and the quality of life of cancer patients. Based on the concept of integrated targeted radionuclide diagnostics and therapeutics solutions in precision oncology, the Company established GMP facilities and a robust global supply network of innovative, first-in-class medical radioisotopes.
For those accredited investors looking to take advantage of private company opportunities before they potentially become public, ITM is definitely worth a closer look. The current Opportunity will be closing in the next few weeks, so feel free to reach out for more details.
I don’t know about you, but that seemed like a lot of information to take in, so I will round out this month’s newsletter in the hope that it has been helpful to those who emailed me questions.
Tying into those explanations, FANG stocks which led the market rise over the past many years will take a back seat to cyclical value for the foreseeable future. The reopening rally is currently leading the market with all eyes on the stimulus packages. Being able to isolate the stocks that will do best in this environment is your key to success.
Don’t forget to email me any questions you have and if you’re interested in having a chat. It is a very exciting time to be investing.