Investor Insight – A Look to the January Markets

The New Year is upon us and for many, we will be saying goodbye to a difficult 2020 and hoping that 2021 proves to be more fortunate. For those that follow my monthly investment news, you will notice this is a few days late – one of the joys of New Year is that it gets extremely busy for investment managers as new clients create resolutions to make their money work for them.

So, what does January have in store for the stock markets? Let’s take a look!

 

President Biden

One of the things that I have been tracking since November is the uncertainty around the presidential elections. It seems that by the time this newsletter goes out that Joe Biden will be on his way to the White House. The markets have been extremely buoyant (in record breaking fashion) under the last few months of the Trump administration and with COVID-19 vaccines and stimulus packages on the way, things seem to be moving in the right direction.

My personal opinion is that providing there are no radical policy changes made by the incoming president, the markets should stay resilient going forward. Biden inherits an economy that is slowly recovering, and it is expected that he will continue to stimulate the economy before trying to enact any controversial policies such as tax increase and healthcare reform – but then, this is US politics, and we all know that anything could happen!

 

Brexit and UK/EU Markets

The UK successfully achieved a trade deal of sorts that saw them exit the EU with a spring in their step. However, even a successful Brexit is not able to sort out a struggling UK economy and with almost 12 months in some state of lockdown, the country is beginning to feel a financial strain.

With Brexit finally in the rear-view mirror the country can begin moving past the cloud of uncertainty that’s surrounded it for so many years. Although far from perfect any deal is viewed as a success by markets. It is expected that beyond March, both the EU and UK economies will rally as their own reopening create momentum.

 

US Dollar & Gold Price

Sticking with the theme of currencies, the next thing to keep your eye on this month is the price of Gold, which has been making a positive move higher. This is of no surprise given the recent US Dollar weakness. Investors are expecting continued weakness in the US dollar as governments are forced to borrow to fund massive stimulus packages and increased budget deficits.

Likewise, silver has had an equally impressive recent performance (actually slightly better than gold in terms of yield percentages), and it is expected to last at least a few more months.

Commodities like gold are seen as a safe haven when currencies are weaker. Copper should benefit as well from a weaker dollar and increased economic activity globally.

 

Reopening Stocks

2021 brings a lot of uncertainty and the reopening rally will be no different, especially as the stocks that traders are targeting are the ones expected to bounce back in a COVID-19 free world. The likes of Six Flags (SIX), Disney (DIS), Cedar Fair (FUN) and Planet Fitness (PLNT) are all key stocks that will benefit the most from the reopening of the economy and have already recovered nicely.

As mentioned in my previous newsletter, the risks lay for those investors holding stay-at-home stocks too long. They have already begun to correct and in my opinion will continue to do so as the opening rotation gains momentum, I continue to suggest taking profits in the stay-at-home stocks.

 

Valuations Stretched

Currently, there are a good deal of bloated stocks floating around with the valuations of these stocks stretched (sometimes in spectacular fashion). Much of the trade lately has been with investors chasing the profit and buying up these stocks. While some stocks may well grow further, it isn’t a certainty and investors run the risk of buying into an inflated stock that hasn’t got the room to grow further.

A good practice to start doing is to move away from last year’s winners and look at last year’s losers, picking out the stocks that are needed within the market. It is underperforming stocks that have historically traded well in a market that people need that you should be targeting. It will mitigate risk and keep you away from the big group of investors that are going to be sorely disappointed because they chased stocks with stretched valuations. If you don’t want to take my word for it, Elon Musk has himself said that Tesla (TSLA) stock is trading way too high and while he does undoubtedly have his reasons for doing so, he isn’t lying either – Chasing Tesla at these levels is a risky game.

Lastly, many investors aren’t keen to dip their toes into international markets because domestic markets are seen as ‘safer’. This is untrue and during times of stretched valuations, one of the best things you can do is look to international markets for stocks that have yet to be rewarded. The key here is don’t chase stocks with stretched valuations, it will only end in tears.

 

The US Gambling Wave

2020 was an odd year for many reasons, but not least because US officials and state governors began to look more favourably on the gambling industry. Long considered a ‘vice industry’.

Then the virus hit, and state officials saw traditional streams of revenue drying up and began listening to the gambling lobbyists a bit more. The promise of a steady stream of income during a dry time was too good an opportunity to pass up and a wave of legislation was bought in to make gambling much more accessible.

This has meant US stocks in the gambling market have pretty much taken off. Draft Kings (DKNG) became public through a SPAC at $10 and is trading at approx. $50. Mergers are further fuelling the interest. Currently, MGM (MGM) has put in an $11billion bid for Entain which looks set to be turned down, but it is expected MGM will come back with a much higher figure. The reason being that MGM now has the opportunity to expand its US operations.

This is the same across the industry and many gambling/entertainment companies are now looking at ways in which they can make sure they profit from the big pit of money that has just been unveiled to them. As a result, you can expect stocks in gambling companies to be hot stuff throughout 2021.

 

Little to No Yield in Fixed Income

Snice last June when the Fed stated it would be purchasing individual corporate bonds, including those rated junk by credit agencies. Yields have dropped off a cliff to the point where there is little to NO value left. This has left investors out in the cold and made my job as a portfolio manager even more difficult. For those with the risk tolerance and the ability to think outside the box I suggest look to alternatives to fill the once routine US corporate bond bucket of their portfolio.

 

Private Equity Opportunities

For those investors with access and understanding in the space Private Equity can become a great portfolio enhancer.

In my opinion, private equity holds the biggest potential for clients, but it needs to be approached with a level of care. With that said, watch this space as there are going to be some very exciting private equity deals that our investment team will be vetting over the next year.

 

Happy Trading for January!

To finish, I want to wish you all a very happy and prosperous New Year and if now is the time that you have made up your mind to make your money work for you – then get in touch! I am always happy to have the conversation and tell you specifically what I can do for you. After all, no two financial situations are the same, so reach out today and make your 2021 the best year yet.

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