Regime change

We’ve had a lot of important news over the last couple of weeks. Biden has been declared victorious in the US elections, though Trump is yet to concede defeat. On Monday we also had the groundbreaking news that Pfizer’s Covid vaccine is claimed to be 90% effective. These changes have resulted in a lot of stock market volatility. This hasn’t been great for my portfolio so it seems important to take stock of the situation.

The reaction to Biden’s election victory had been overwhelmingly positive, with the stock market rapidly reclaiming the losses of the previous weeks and tech stocks doing particularly well. This wasn’t particularly surprising. The market probably saw greater prospect of more expansionary stimulus and Republicans have maintained control of Senate, reducing the chance of some of the more aggressively anti-corporate Democrat policies. While the result was controversial, it may have been less controversial than feared. It seems unlikely that Trump’s legal cases will get very far as they appear to be lacking in any concrete evidence. There have been no riots in the street so far. More prosaically, it’s likely that investor fears were multiple and not clearly defined, in keeping with the classic adage, ‘the market hates uncertainty’. Since the world didn’t end, the more panicky investors that had reduced their exposure to the uncertainty decided it was now time to creep back out from behind the sofa.

The vaccine announcement had a much more dramatic impact on the stock market. Overall the stock market rose following the announcement. More significantly, there was a savage rotation towards the cheaper, cyclical businesses that have been more severely affected by the Covid restrictions, away from the mostly technology-oriented businesses that had benefited or been relatively unaffected.

The direction of this move makes sense. The news that the vaccine has 90% effectiveness is much more positive than some had speculated. The likely duration of lockdown restrictions and accompanying expansionary policies may now be shorter. However, while the impact on my portfolio has not been too severe, the extent of the reaction has surprised me. While some uncertainty has been resolved positively, a lot remains. There is still some way to go in gathering evidence on the Pfizer vaccine’s safety. There is also still considerable uncertainty about timeline for implementation and the extent to which this will contribute to the recovery of the businesses that have been affected by Covid restrictions.

The question now is whether this is the start of the long-awaited regime change from growth to value. I’ve read that in factor terms there was a rotation towards value of an unprecedented magnitude in a single day on Monday. However, this seems like a potentially misleading way of describing the shift that happened. If I look across my watchlist of 100 high quality shares there are quite a few highly rated shares that have been positively affected. The pattern seems to be of a shift from lock-down immune to lock-down sensitive rather than from value to growth, which would of course makes sense given it is the reaction to news of a vaccine. As I’ve said several times before, I think the big picture for growth vs value is driven primarily by prospects for interest rates. It’s plausible that this vaccine announcement could be the advance signal of an imminent economic recovery and less accommodating monetary policy but this seems unlikely to me. I think it’s more likely that it will soon become clear again that the macroeconomic situation is little changed and the inexorable advance of high quality tech stocks will resume. However, in the short term we may be due a bit of turbulence.

I don’t think there is much reason to change my strategy. However, given the uncertainty, I might look to increase my weighting towards cheaper recovery plays in the interest of diversification. Volatility creates opportunities as the knee jerk reactions of many investors can often be to throw the baby out with the bathwater. To this end I took advantage of some of the turbulence this week to increase my weighting in Games Workshop, which fell quite a bit despite its cracking trading update last Friday. I also decided to trade in my LSE holding for a small profit and took the opportunity to buy some shares in Tracsis. Tracsis has been negatively affected by Covid restrictions, but was exceptional in its share price not reacting much to the vaccine announcement. I’ve had my eye on it for a little while as the share price has declined to a level where the valuation has started to look very attractive.

The last few weeks have also seen a lot of corporate results for the shares on my watchlist, especially those listed in the US. Overall, they have been remarkably positive with the vast majority significantly beating expectations. One exception was Mastercard, whose results suggested the impact of Covid restrictions on its profits from cross-border transactions was worse than previously anticipated, causing me to sell. This was a difficult decision. As I’ve said several times I have a lot of conviction in Mastercard’s business long term. However, a profit warning is a profit warning and I thought my money was better off elsewhere. The fact that selling Mastercard allowed me to raise the remaining funds for my house purchase all in one go also helped tip the balance. The vaccine news has obviously changed things and in the benefit of hindsight it’s already clear that this trade was mistimed, though I don’t think I could have reasonably predicted this in advance.

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