How Investors Should Read Into This Market Rotation

Dear friend of AQUMON, 

US markets saw further pressure last week due to rotation out of US technology stocks while other regional markets were muted. In comparison, with the release of a number of positive economic indicators, drove China’s stock market upwards this week. The US’ S&P 500 index was -0.64% last week and +2.75% year to date. Regionally, Europe’s Euro Stoxx 50 index and Hong Kong’s Hang Seng index was -0.97% and -0.2% last week. China’s CSI 300 index in contrast rose by +2.37% last week.

AQUMON’s diversified ETF portfolios were -0.00% (defensive) to +0.80% (aggressive) last week and +2.38% (defensive) to +2.73% (aggressive) year to date. AQUMON’s SmartGlobal HK ETF portfolio with more regional exposure to Hong Kong/China is +1.14% (defensive) to +7.88% (aggressive) year to date. Last week’s main portfolio drivers were Chinese technology stocks (+4.25%), Asian stocks (+1.52%) and emerging market stocks (+1.45%).

Two weeks ago we suggested to investors not to fear the US tech selloff and we continue to believe that is the case. Although investor confidence is a bit shaky during this expected period of higher volatility what is clear is that most investors are not immediately exiting the market (unlike during the selloff in February) but instead rotating into other asset classes and sectors. As we mentioned on multiple occasions to our investors this is much more healthier than just seeing 1 single sector (US technology) continue to balloon in pricing and valuation.

Given there are quite a lot of questions about the market this week we’ll go over what we see in terms of investor movement and also outline the market unknowns ahead. When looking ahead we would not be that surprised if broad markets saw another 5-10% (maybe more) short term drop but we still are cautiously optimistic and carefully adding to our investment portfolios during this phase where the market is weaker. 

Investors continue to rotate into cheaper valued sectors

So the #1 reason why we suggest to investors that they need to look more closely at the data is because the recently ‘selloff’ is more of a rotation into more cheaply valued sectors such as cyclicals (materials and industrials):

The outperformance of such cyclical sectors are 7.14%-8.02% versus US technology in September. Having said that investors need to be aware that for these cyclical sectors to pick up more buying and pricing steam they also need support in terms of an improving economic backdrop. Considering fundamentals are quite weak recently, as we saw US Federal Reserve Chairman Jerome Powell urging US Congress this Wednesday to provide more fiscal support and stimulus, this is why this past week we’ve seen investors rotate in (and out) of technology causing more market volatility than normal.

When looking at larger institutional investors, there is also a higher than normal amount of bearish speculative bets on the Nasdaq index in September:

This is in stark contrast to the still bullish options buying momentum by retail investors. Although it is hard to estimate if these institutional traders will pivot back to bullish buying later in September but market volatility is likely to be elevated during this period as a result as both segments of investors (retail vs institutional) are positioned against each other.

This honest truth is investors are a little caught between a rock and a hard place with their money where there aren’t many investment choices in this low/zero yielding environment, value sectors don’t have much economic support to continually outperform and technology continues to be the best positioned sector during COVID-19 even though valuations are on the high side. It is possible that when a COVID-19 vaccine is approved (analysts estimate sometime in early/mid 2021) that this may end the favoritism of technology stocks amongst investors (and a proper rotation into value sectors and regions) but for now technology is fortunately (and unfortunately) the best game in town.

Unless we see more stimulus support from the central bank or a sharp market correction investors should brace for higher market volatility as we head into October and November. This isn’t something investors should fear but actually carefully use this opportunity to add to your portfolios when we see sizable pullbacks in broad markets. As we’ve been communicating to investors for the past few months we’re still positive when looking ahead but also remind investors to carefully manage their portfolios’ risk through diversification and how much they invest in the market.

The passing of US Supreme Court Justice Ruth Bader Ginsberg (RBG) adds further uncertainties to the upcoming US election

Over the weekend many Americans mourned over the death of US Supreme Court Justice Ruth Bader Ginsberg (RBG). She was a trailblazer in fighting for both gender equality and women's rights. She was 87 years old when she passed away from complications of pancreatic cancer.

What does a Supreme Court Justice’s passing have to do with financial markets? Although there is no ‘direct’ impact it does add uncertainty to the ongoing development for the US election on November 3rd (40 days away). If there is one thing markets dislike more than bad news...it is uncertainty. 

Investors already anticipate there will be a contested US election result and if this is indeed the case the result of the next US president could be decided by the US Supreme Court. Currently with 7 remaining justices: 4 conservative, 1 more in the center and 3 liberal, a nomination of yet another conservative judge by US President Donald Trump would tip the scales more in favor towards a Republican president if this was ultimately decided by the Supreme Court.

How did broad markets react to an undecided or contested US election result? Look no further than 2000’s US presidential election between Al Gore and George Bush Jr.. For the 35 days between November 7th (date of the election) until December 12th (when the Supreme Court decided the outcome) the S&P 500 index was down a -4.23%:

In the grand scheme of things this is not a huge drop down when you consider all the sensationalist headlines it brought along. Clearly this year’s election may drag on longer and may seem more dramatic but when we extend our time horizon election results rarely have much lasting impact to financial markets.

Even so, investors should understand what risks they are up against then properly prepare for them versus reacting to headlines and their emotions. Taking a page right out of the late Ruth Bader Ginsberg, what she did so well over her long and impactful career was she always took time to carefully understand all the perspectives and then made logical and powerful decisions as a response. We should all consider approaching our investments in the same way.

Watch out for further liquidity injected to uplift markets

Although the additional US stimulus situation continues to be in a stalemate, the US Federal Reserve Chairman Jerome Powell further urged Congress for more stimulus support this Wednesday. Readers of our Market Insights know that a big reason why broad markets rallied since March has been on the back of stimulus from their respective central banks: 

So if we see another fresh round of stimulus (and it meets or exceeds market expectations) this will provide markets with another fresh adrenalin to reach new heights. Readers of our Market Insights know we ask investors to “follow the cash” (added liquidity injected by central banks).

Before this potentially happens, the best policy by investors is still to be diligent in managing their portfolios’ downside risk while carefully positioning for upside potential. As mentioned earlier we are careful accumulating even during this period when markets are higher in volatility. 

If you have any questions please don’t hesitate to reach out to us at AQUMON. We’re always happy to help. Thank you again for your continued support for AQUMON, stay safe outside and happy investing!

Ken

About us

As a leading startup in the FinTech space, AQUMON aims to make sophisticated investment advice cost-effective, transparent and accessible to both institutional and retail markets, via the adoptions of scalable technology platforms and automated investment algorithms.

AQUMON’s parent company Magnum Research Limited is licensed with Type 1, 4 and 9 under the Securities and Futures Commission of Hong Kong. In 2017, AQUMON became the first independent Robo Advisor to be accredited by the SFC. AQUMON’s investors include Alibaba Entrepreneurs Fund, Bank of China International and HKUST.

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