Investment Updates – PIF PMC November...

Investment Updates – PIF PMC November 2020

www.platinum.com.au/Investing-with-Us/Investment-Updates

Market Update: 3 December 2020

BY CLAY SMOLINSKI,

As the end of a turbulent 2020 nears, this update is an explanation of how and why the flagship global equity portfolio is currently positioned as it is.

We are nine months on from the largest economic contraction in 90 years, parts of the market (best illustrated by growth stocks) have had a huge rally, however, over the past month, triggered by the news of a successful vaccine, we have seen a strong rotation into the more cyclical areas of the market. This raises the question of how best to be invested now.

To explore this, it is worth considering two scenarios:

1.The first scenario is the status quo i.e. more of the same. Since the intensification of the US-China trade war in 2018 we have had a bias to slowing growth, low inflation, and the rate-hiking cycle of 2017 was paused and moved to cuts. The COVID-induced recession has reinforced a view that this scenario will persist far into the future. The outcome is that growth stocks have been in huge demand from investors. This is the current trend in markets, and we have to be open to the fact that this trend could persist.

2.Thesecond scenario is to acknowledge that we have had a major shock and are now in an economic recovery. As our economies re-open with a flood of stimulus behind us, this recovery could be quite powerful. Historically, from this point in the cycle, the best returns would be expected to come from cyclicals - the companies directly benefiting from that recovery. This would represent a break in the current trend.

The reason an investor should consider the latter case is driven by three factors:

1. The data is consistently better than expected and looks to be accelerating.

2. Supporting the recovery is a different fiscal and credit environment vs. the past.

3. A successful vaccine changes the path we have been on.

Putting this together, and combining it with the fact that recovery stocks are where we believe the majority of relative value lies in market, it makes sense to have meaningful exposure to this second scenario.

In constructing the flagship global equity portfolio, we are essentially weaving these two scenarios together.

We want to own stocks where there is value and a direct benefit from the recovery, but there must be something more - there must be a growth driver that will drive earnings, should the recovery take longer or be weaker than expected. There must be more than mean reversion.

In a similar fashion, we are happy to own businesses in the quality growth mould that are benefiting from long-term changes, but are focused on identifying tomorrow’s growth companies that are not being priced as such today.

Key components of the flagship global equity portfolio

·20% in Growth Industrials. These stocks are recovery beneficiaries but also have strong long-term stories e.g. Carrier, FedEx and Indian truck-maker Ashok Leyland.

·16% in Semiconductors. These holdings are powered by three major themes - investment in cloud infrastructure, internet of things(IoT) and 5G.

·14% in Travel-related stocks. Acquired during the peak of the COVID lockdowns, our holdings have begun to perform strongly post the positive vaccine data. We believe many of these businesses will go back to being viewed as ‘quality growth’. Examples include on-line travel agents like Booking.com, or the Chinese leader Trip.com.

·11% in Chinese consumer stocks. Examples include Ping An Insurance, AIA and Li Ning.

·8% in Healthcare stocks. The portfolio has benefited from positive news on a COVID vaccine and therapeutics over the course of the year and we have recently trimmed our exposure on valuation. Takeda remains a keyholding.

·6% in Internet-related stocks. We have significantly reduced our exposure from around 14% in August 2020, as the strong prospects of the companies we owned are increasingly well-expressed in their prices.

In summary, it is increasingly clear that we may be on the cusp of a significant change in markets after a long trend, and if so, we expect there will be a change in the kind of companies that will likely benefit. With our portfolio tilted towards these, the stock price moves in November give us a sense of what may lie ahead should this continue, but above all, it shows the benefit of diversity of approaches for different conditions.

www.platinum.com.au/Insights-Tools/The-Journal/Market-Update-2-December-2020