Monetive Wealth Market Musings

A portfolio approach for trying times

The war drags on and the Ukrainians are bravely fighting back and sacrificing everything to defend their country and their way of life. The human and economic toll is immense and getting worse. The humanitarian and refugee crisis has barely started and it could lead to a near-term economic weakness. This is where I will pick up this post.

Stagflation is already being discussed and written about and the bond market is betting ECB and BOE will not be able to raise rates this year. US is not immune and the probability of a 50bps hike in March has all but disappeared. Markets are in a confused state at best but still definitely biased down and rips are being sold off. VIX is very elevated and looking to head even higher. Against this backdrop, Financials are being wiped out and reopen sectors have stalled. Technology sector is faring better overall after a brutal 2-3 months and looks to be consolidating and forming a bottom. The commodity sector continues to be the big winner. We started 2022 with money rotating out of Tech and growth into Commodities and Financials. By mid January, the re-open sectors joined the party especially travel sector, transports, parts of consumer discretionary. As the growth sell off continued, and geopolitical issues emerged there was safety buying into Staples and Utilities. Financials stalled and commodities continued to run. When the war became a real, financials sold off with bond buying wiping out yields. Safety trade was in full swing, re-open sectors froze, Energy took off along with Defense suppliers. And we are barely out of February. In other words, sector rotation is the norm just a lot faster than normal.

Against all this negative backdrop, here are a few reasons to consider this an investment opportunity of a lifetime.

1. US Growth is still very robust and we are at or near full employment.

2. EU and UK growth is gathering momentum and unlikely to be halted fully due to the situation in Ukraine.

3. Reopening worldwide will breath life into dead sectors and help boost growth across the worldwide especially retail, travel and tourism

4. All indications are pointing to a new cold war and a re-arming trend which is a massive fiscal stimulus especially in EU and Japan.

5. While the inflation data looks ominous right now, it is closer to the top than any time in the last few months. Any positive Geo political development will bring down energy prices and quickly drop headline inflation numbers.

6. Oil output is increasing steadily and should eventually help with the demand-supply imbalance.

7. With Covid largely behind us and China reconsidering Zero Tolerance policy and this could contribute massively to fixing the supply-chain imbalances.

Let’s see how we trade this going out. To answer that we need to default back to our tried and tested model of Thematic Investments anchored to Sector Rotation. In the last post I wrote about sector performance at various parts of the economic cycle. To beat the overall market, we have to rotate into sectors with tailwinds and out of weakening areas. Layering on economic data and themes gets us the following sectors in play:

1. Technology: Warren Buffet once said that it is wise for investors to be “fearful when others are greedy, and greedy when others are fearful. That is never more truer than the tech sector today. Tech is such a large part of the entire market and it is difficult to envision a market beating portfolio without significant exposure to the sector. There is still a lot of froth left to come out but there are already some bargains available today to start nibbling. I particularly like Cyber Security, Data/Analytics, Semis, Cloud, Communications. Let’s look at it one by one

   1. Cyber Security: Cyber war will be the primary frontier in the next cold war and this is going to be front and center for years to come. CIO’s are prioritizing security budgets over everything else and as we get more incidents, the spend on security will only go up dramatically. I also expect massive consolidation wave in the industry. ZS, SI, MNDT are my favorites in this sector.

   2. Data/Analytics: Data drives competitive advantage and organizations that are able to mine and use data in a timely manner will have a significant leg up in their markets. Spending on data lake and analytics to make sense of the mountains of data being collected ensures that this is the biggest IT spend in companies and the most critical after cyber security. SNOW, DDOG, PLTR are my top picks.

   3. Semiconductor shortage is now almost a year old and there are no signs of a quick resolution. Meanwhile the demand for semis is increasing every day. I am particularly interested in the parts of the industry that have extreme pricing power: My favorites are SemiCaps and 5G stocks: ASML, AMAT AMD, MRVL, QCOM.

2. Energy: There is certainly a war premium in the market today but the larger force at work is the supply-demand imbalance and this is going to take time to resolve. I expect Oil to stay above 70$/barrel for most of this year. Nat Gas will probably be even more volatile with a fall off in summer only to run back up as we get into fall/winter demand. Within energy, I still like the Oil majors (TTE, EQNR, E, BP, SHEL, CVX, XOM). They will still make huge margins even if oil pulls back to $70 range. With low spending on drilling and exploration, profits are going into buybacks and dividends, which is bullish for stocks. These companies are also big players in Nat Gas. I will be hedging this with a short on the commodity using etf’s like SCO. Among Nat Gas centric plays, I like LNG, DVN, CHP. I like both the major pipeline operators ENB and KMI.

3. Basic Materials: Industrial Metals are getting a lot of play from geopolitics: Aluminum, Copper, Titanium, Platinum, Palladium are all running on expectations of disruption in Russian supply. Customers are going to reduce dependence on Russia and get into long term supply contracts with other suppliers as a hedge

   1. Aluminum: AA, RIO

   2. Copper: VALE, FCX, BHP

   3. Palladium & Platinum: SBSW, IVPAF, ANGPY, NMLTF, PLG, VALE, IMPUF

   4. Nickel: VALE, BHP, GLCNF

   5. Titanium: ATI, HWM, CC, HUN, KRO,

   6. GOLD: NEM, GOLD, VALE, FCX

   7. Neon: AIQUY, LIN

   8. Fertilizer: NTR, MOS

4. Reopen Sectors: Once UK removed the COVID restrictions it started a domino across the world of easing of restrictions. By Spring most of the restriction should be removed and everything should be reopen with minimal restrictions. Reopen stocks have been running from early January on this. But even they have sold of substantially since the Ukraine crisis and this is a great opportunity to reenter some of these:

   1. Airlines: LUV, DAL, UAL SINGY

   2. Travel: BKNG, ABNB

   3. Cruise lines: RCL, NCLH

   4. Retail: VF, LULU, ULTA, QSR

5. Defense Industries: The current tensions with Russia and China will endure long after the immediate crisis passes. We are looking at a new cold war and this is just the beginning of a major build-out of defense capabilities across the world and especially in Europe. There are a few different plays here: The obvious ones LMT, NOC, BA, GD and the like which will start seeing greater demand but this will take time to play out. I think the immediate winners are likely to security contractors, logistics providers, Missile Defense systems and Drone suppliers. Here are my picks: RTX, KTOS, LDOS, LHX, CACI, KBR.

We have not had a washout in the market yet and that could be deep and painful. I am not recommending anyone get into positions immediately but rather use this as a guide for further research and to prepare a shopping list ready when the big flush does come to pass. These sectors will give you the market beating return from the secular tailwinds that are driving demand and pricing power.

I have mentioned in my previous posts about my collaboration with ArchnaTrades. We are excited to announce the next phase of that collaboration. We are going to be debuting a model portfolio with fundamental & technical analysis. The portfolio will be have entry and exit targets and will be regularly updated along with any hedges in place to protect profits and capital. This is an actively managed portfolio using our thematic and sector rotation approaches to deliver market beating return at at a reasonable risk. As most folks return to work, active trading becomes more challenging. We are confident that a portfolio approach is more appropriate. This is how we manage our capital but as always this information is for educational purposes only.

Stay tuned for more information here…

Please do your own research before you invest real money. Consult your financial advisor/ RIA to discuss what is appropriate to your own financial situation and risk tolerance.

As always a humble request to please share this if you find the information provided here to be useful. Add any comments on how I can make this better or questions on topics you would like to see covered in the future.