What To Do with Market Reaching All Time Highs

On the lack of new vaccine breakthroughs and lukewarm economic numbers global financial markets were quite static 2 weeks ago. The US’ S&P 500 index was down slightly -0.77% and +10.11% year to date. Europe fared slightly better likely due to rotation into lagging regions with the EuroStoxx Index +1.04% and -7.41% year to date. Locally, Chinese A-shares continued to rise +2.06 and Hong Kong’s Hang Seng index was +1.13%.

AQUMON’s diversified ETF portfolios were +0.04% (defensive) to +0.56% (aggressive) last week and +2.42% (defensive) to +9.93% (aggressive) year to date. AQUMON’s SmartGlobal HK ETF portfolio, with more regional exposure to Hong Kong/China, was +1.30% (defensive) to +12.79% (aggressive) year to date. Although markets were very quiet last week, US small caps (+2.13%) and emerging market stocks (+1.63%) had modest gains. 

With both the US’ Dow Jones and S&P 500 index hitting all-time highs last week we had clients asking what they should do next. So this is the main question we will address this week:

Investors should not fear these market levels

Although readers of our blog know we started to communicate to investors to be more careful heading into December (due to elevated volatility) we still hold a positive view of markets particularly as we enter 2021. Short term there may be some profit taking pressure (like we saw after all time highs by the S&P 500 on February 19th, August 18th and September 2nd) but particularly this year, where markets have been more volatile, it has rewarded those who stayed invested. A few reasons why:

1) A new high itself is not a sign of danger

Considering with the S&P 500 index (outside of this week) we’ve already experienced 3 other new highs in this year alone (each one higher than the last) so reaching this milestone is not a sign people should exit markets. What investors should be more concerned with is while financial markets are dislocated with the economy whether there are catalysts that will drive it higher such as liquidity by central banks. 

Furthermore, when this dislocation reduces whether our economy has truly improved thereby supportive of markets reaching new heights ahead. As we mentioned to our readers these past few weeks beyond vaccine advancements, anticipated better corporate earnings in 2021 as the economy reopens we think the unwinding of previous market unknowns, such as the still-developing US elections results, is also supportive of more new highs ahead. 

2) Valuations are high but not unreasonable

Although the S&P 500 average valuation stands at around 33.10 as of Thursday (about 32% higher than the average in the past 20 years) we wouldn’t classify valuations as unreasonable:

What we clearly see is in the US market is the diverging performance and valuations amongst technology orientated growth stocks and laggers sectors such as financials and energy: 

So the goal for investors during the next 3-6 months is to retain exposure to high growth sectors while the economy is figuring itself out while also positioning for exposure to lagging sectors which should get a boost as the economies slowly reopen in Q1-Q2 of 2021. This lagger effect also applies from a regional perspective which we outlined in last week’s blog to include emerging markets stocks particularly in Asia which are better positioned to reopen their economies faster, are lower in valuation and also have added help from the continued weakening of the US dollar.

Is it time to buy vaccine related stocks? Not so fast yet…

With so much positive news coming from pharmaceuticals recently with Pizer, Moderna and Astrazeneca is it time to jump on the vaccine bandwagon? Let’s first have a look at how these stocks did relative the MSCI World Healthcare index this month: 

As you can the MSCI healthcare index has not really spiked that much relative to these names. Why? Beyond the index also encompassing non-vaccine companies the main reason is because for most vaccine developers the success rate is relatively low at 33% from phase 1 to approval (many may not even make it to phase 1 and get washed out at the pre-clinical phase):

 So even though there are about 70 companies worldwide developing 230+ COVID-19 vaccines many of them likely will never make it to stage that their COVID-19 vaccine is actually ready to be deployed. So for many investors this ‘vaccine play’ will be much more an individual stock picking approach versus just trying to gain exposure via an index.

Cash and gold may be our friend going into 2021

As we eluded to last week in our blog correlations amongst traditional asset classes such as stocks and bonds are becoming more positive. This means that as stocks drop in value bonds may also drop as well. Traditional speaking this should be an inverse relationship where bonds rise in value as stocks drop in value. So taking a traditional 60/40 (stocks vs bonds) portfolio approach may run into issues whereby the bond part of your portfolio does not offer the protection it is designed to do. 

Furthermore as interest rates remain low for the foreseeable future, the upside for bonds can also be quite limiting. For clients invested via AQUMON this is less of a concern since we continually monitor correlations and offer adjustment recommendations for our clients, but for non-clients we suggest that adding cash and/or gold to your portfolio may be beneficial as you head into 2021. 

For protection purposes cash will be more beneficial but clients need to watch out if they hold US dollar (which has and is expected to further depreciate) and or currencies tied to the greenback like the Hong Kong Dollar. Currencies like the Euro, British pound, Australian dollar and even the Chinese yuan are likely better positioned. To hedge out market uncertainty although we don’t expect it to rally 25% again in 2021, investors can consider gold which may be a better hedging choice than traditional bonds. 

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 major investors include the HKUST, Cyberport, Alibaba Entrepreneurs Fund and the Bank of China International's affiliate.

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