What a week!
In the span of 5 days, we went from “Blue Wave (Democrat Sweep)” to “Oh shit Trump is gonna win” to now a base case narrow Biden victory.
Anyway – this is an investing blog, so we’ll leave aside all your views on who *should* win. Because what makes money is what actually happens.
So I challenged myself to come up with my 3 highest conviction stocks, for a long term investor (3 – 5 years or more timeframe).
Basics: What is the current base case for the US Elections
As at the time of writing, my base case is for:
- A narrow Biden victory
- Trump to contest the vote count, but will ultimately fail
- Senate remains controlled by the Republicans – limiting Biden’s ability to pass laws
Earlier this week, I shared this for Patrons:
If Biden wins the pro-Biden stocks will do well:
- Green Tech (solar, electric cars etc) – and conversely, shale/oil will suffer
- Healthcare – talks of reform for healthcare, so certain stocks may benefit
- Housing – Stimulus for housing
- Banks may not do so well – Because of talk of increased regulation
- Tech – Will benefit because Biden is less likely to pass regulation
The main problem though, is that Biden has been very silent on his policies to date.
His campaign has mostly been run on the basis of “NOT Trump”, rather than what he would do.
So investors won’t actually have much clarity on what happens next – unless he decides to clarify them.
If Biden wins, he will only take office in Jan, which will create a 2 – 3 month period of lame duck presidency, where nothing can pass. This means we won’t see any stimulus until Jan, and it’s also not in Trump’s interests to do Biden any favours on the COVID handling.
What actually happened?
The main change from the above, is that while Biden will likely win, the Senate will remain controlled by the Republicans. This will allow them to block any laws passed by Biden.
This means that:
Lame duck president
Biden will not be able to pass controversial legislation.
Increase in tax rates, big healthcare reform, that’s all out now, because Republicans will block it.
This is great for business.
On the flip side, because Democrats don’t have legislative control, they also don’t have free reign to pass fiscal stimulus.
So the 3 trillion package they were talking about is probably gone now.
It’s not in the Republican’s interest to pass a big fiscal package and make the Democrats look good.
If fiscal is not going to be big, then we have to fall back on monetary policy – via the Feds.
Funnily enough, this election result actually means the Feds could be the crucial factor going forward.
So the past week the QE trade did well – tech, bonds, gold etc.
What are my 3 highest conviction stocks right now?
So I wanted to challenge myself to pick my 3 highest conviction stocks. I like it because it forces me to accept the market as it is today, and decide what will perform best going forward.
A couple of caveats
For those who are newer to Financial Horse, I do want to emphasise some basics:
- Long term portfolio – This blog focusses mainly on long term investing. 3 to 5 years timeframe or more. We’ll sell stocks if prices go crazy in the short term, but the default holding period is longer term.
- This assumes a balanced portfolio – Just because I say these 3 stocks are great, doesn’t mean I will go max long these 3 stocks. I still have a balanced portfolio – and then I overweight certain sectors. In investing there are no guaranteed outcomes, so you always need to hedge against multiple scenarios. The exact mix will depend on your risk appetite. So if you’re more risk adverse, you may have a 70% balanced portfolio, then use the 30% to overweight high conviction bets. Or if you’re more comfortable with risk it could be 30-70. And so on.
That said, if I did want to build a short-term strategy, I would focus on funds flow.
I would probably hold the momentum stocks (esp in Tech), and focus more on the smaller caps (higher upside, avoiding the index constituents). For a longer-term strategy though, the considerations are just completely different, because it will have to focus more on a fundamental style analysis.
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Top 3 stocks I am buying after Trump loses
- REITs – MCT or CICT
- Tech – Alphabet, Netflix, Tencent
- Gold / Bitcoin / Silver – but needs to be sold eventually
REITs – MCT or CICT
Longer term, high quality real estate in a gateway city is still one of my highest conviction bets.
Sure, in the short term, rents are going to drop.
Retail will probably see negative rental reversions at least until 2021. Industrial came in as a shock when Ascendas reported a -16% rental reversion for certain logistics spaces – indicating industrial space is not as strong as what people were expecting. Offices are going to stay weak for a while too.
But longer term, I don’t believe a country like Singapore can do without well located real estate.
I think human are social creatures, and no amount of online interaction can replace the need for physical space. The way we use the space may change, but the demand for real estate will remain – as long as they are high quality, and in great locations.
I also think the coming wave is inflationary, and high-quality real estate is a classic inflation hedge.
So as a longer-term investor, I would take the opportunity to average in the cheaper I can get.
The key is to focus on great property in fantastic locations, and to find a sponsor with little to no risk of insolvency.
Both Mapletree Commercial Trust (MCT) and the newly merged CapitaLand Integrated Commercial Trust (CICT) fit this profile for me. The cheaper the better.
I think the Biden win is bullish for Asia in general, so I would favour Asian real estate especially at these prices. CRCT, Starhill Global, MNACT are all picks I am also looking at – check out my stock watch for the full list.
Tech – Alphabet, Netflix, Tencent etc
I included tech because I think that the technology revolution is only just getting started.
The first industrial revolution was the steam engine and it lasted almost 80 years. It magnified mankind’s physical power, because now machines could do the heavy lifting.
The second industrial revolution was electricity and oil and lasted more than 100 years. It changed the way we lived, the way we travel, and the materials we use.
The internet revolution only really started in the 1990s, which puts us in year 30. And it’s already changed the world as we know it.
The past 2 revolutions freed up our bodies, this revolution will free up our mind.
Think about how Excel has revolutionized accounting – and extrapolate that for the entire white collar economy that relies on brain work. The rise of machine learning and automation will only accelerate this trend. You cant put the genie back in the bottle for this one.
So I still think we’re in the very early days of this revolution, and as a long term investor, you just cannot not be allocated to Tech.
And with a Biden presidency with a Republican Senate, the chances of anti-trust action against big tech are not high – giving big tech at least a few years of smooth sailing (regulatory wise).
The problem though, is picking the right ones to invest.
I think that certain segments of the market are slightly overvalued now, and I’m skeptical if they make sense at the current valuation (esp some of the new IPOs).
So for this category, I chose the more classic ones at more reasonable valuations – Alphabet, Netflix, Tencent. Upside will not be as big as the small caps if you get them right though.
I really like the hardware players as well – Micron, AMD etc. The world will need a lot of silicon going forward.
You can check out my stock watchlist for the full list – Cloudflare was another name I was very bullish on, but it’s almost tripled since March, which makes me reluctant to add further now.
Gold / Bitcoin / Silver
And I think the final one for me will have to be some kind of inflation hedge.
I’m pretty blown away by the performance of Bitcoin. I think that it has really matured into a completely new asset class, with properties that are distinct from any other asset class out there.
This gives it very powerful diversification benefits in a portfolio, and I’m pretty bullish on Bitcoin going forward. I think the run could just be getting started, and it may garner lots of institutional interest going forward.
But anyway, I don’t want to sound like a crypto nut. Long story short, it’s a risky bet, but it could pay off. If you’re not comfortable, then don’t buy it.
Gold or Silver are alternatives as well.
I own both, and I think they’re a powerful diversifier in this climate.
I don’t know exactly how it’s going to play out, but I do think the mid term outcome here is big money printing, and debasing of fiat currency. It’s just the most elegant solution to getting the developed world out of the COVID crisis and the debt situation. If you drop the value of currency, the debts you owe are worth less tomorrow than they are today.
So I think all roads lead to currency debasement, and medium term I like gold / silver (or Bitcoin).
All are outside of the fiat currency system, and cannot be manipulated by central banks.
2 important points to note though:
- Short term is unclear – I think the short term is just incredibly tough to predict. I still think we see a deflationary bust next year, but it’s quite finely poised. We could see a correction in Gold/Silver/Bitcoin before it goes up.
- It has to be sold eventually – In the longer term, gold / silver is not an asset you want to be holding. It’s like what Warren Buffet says, gold doesn’t generate cash flows, it just sits there, forever. So once it fulfils its purpose of hedging against currency debasement, I would want to sell my gold or silver.
Closing Thoughts: How to time the market?
A reader wrote in with a great question:
Hi FH, Sreits are mostly going downhill recently. Do you see a major correction/crash coming to March levels or even beyond? Should we hold and ride the waves (assuming no issue with holding power)? Do you see a recovery in the foreseeable future? Thanks.
Crash to March levels – really tough call. This isn’t like Feb/March where it was obvious things were going to hell and I wrote a bunch of articles on how I de-risked my portfolio. This time around, it’s more finely poised, and the answer depends on how COVID plays out, and how central banks react. Both are not easy to predict with a high level of certainty. So I think a balanced portfolio makes sense to hedge against both outcomes – but tilt to what you believe in.
Hold and ride out – I think this depends on your investing objective. Are you a short term market timer, or a long term investor? For long term investors, I would say look at the risk you are taking on. If the market drops 30% over the next 6 months, will you panic and sell? Or would you add to your positions. Find a risk level that you are comfortable with. The answer has to be unique to you.
So there you have it! My thoughts on how to position going forward. I would love to hear your thoughts, let me know what you think!
As always, this article is written on 6 Nov 2020 and will not be updated going forward. Latest thoughts (and my stock watch and personal portfolio) are available on Patron.
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