Wednesday, March 31, 2021

My thoughts on Nasdaq vs Bond Yield

It’s been a busy month for me with work; hence, I didn’t have time to do any research on any stocks. So to keep this blog alive, I will just share my thoughts on the current Nasdaq performance and its relation to the bond yield. 

The bond yield has been creeping up since July 2020 and sending its 20-year yield to an all-time high of 2.27% (as of 26 Mar). As interest rates are inversely proportional to bond prices, rises in interest rates mean lower yield bonds will drop in price to match current interest rates. Usually, sell downs in bonds signify expectations of economic recovery and inflationary pressure.

Economic recovery should be a boon to the stock market, and that is evident with Dow Jones Industrial Average hitting an unprecedented high; however, the opposite is true for technology stocks in Nasdaq.

Many analysts reason that this is due to a rotation out of high growth technology stocks (Netflix, Apple) to value stocks (Chevron, Boeing) as the economy begins to open up. Another reason for this decline is that higher bond yields result in higher risk-free rates, leading to higher equity risk premiums. Equity risk premiums are generally used in the computation of the expected rate of return in stocks and this has a greater impact on growth stocks. Since technology stocks are focused on growing their topline, they will only generate significant cash flow in later years. So when discounting to present value, their intrinsic value drops significantly.  

Despite the two reasons mentioned above, I am still confident that tech stocks will continue to grow and will grow faster. In the words of Satya Nadella, CEO of Microsoft, “We've seen two years' worth of digital transformation in two months.” Covid-19 has merely accelerated digital transformation where one conducts meetings via Zoom, browses new clothes without leaving their house, purchases life insurance policies without the hassle of face-to-face meetings and comfortably works from home.

Google CEO is considering hybrid models for future work

It is true enough that there will be more employees going back to the office to work after the economy reopens and business travel resumes to some extent. But some changes could be long lasting.  Consider this: how many companies will stop accepting online payment or PayNow and go back to cash and cheque mode? Or, how many companies will close down their e-commerce platform to start a brick-and-mortar store? Not to mention, Tesla has started accepting Bitcoin. The genie is out of the bottle and there is no turning back. Companies like Zoom are still in their early days. What is seen as a video conferencing platform will permanently replace business meetings and disrupt the corporate travel industry, and its open source ability allows it to be used for telehealth or education. 

Secondly, I believe theory of reflexivity is at play here (to some extent). This was famously used by George Soros in his book The New Paradigm for Financial Markets: The Credit Crash of 2008 and What It Means. Soros argues that investors make decisions on their perception of reality rather than reality itself. These decisions in turn affect the reality that influences investors’ decisions. This is self-reinforcing and causes the stock market to move in either direction that is detached from fundamentals and actual economic situations. In our case, rising bond yields result in inflation fears, triggering sell off in bonds and tech stocks and leading to a further drop in bond prices and tech stocks. This adds to investors’ concern that inflation fears are underappreciated, causing more selloffs in tech and bond markets. 

Economic improvement is certain in the coming few months and Consumer Price Index and inflation are expected to peak in May at 3.7% and 2.3% respectively, based on the forecast from Action Economics; however, these numbers do not accurately represent economic recovery. May 2020 falls within the start of the shutdown in the US and many countries, so we are comparing CPI and inflation at their lowest - the numbers would inevitably look optimistic. Hence, the third or fourth quarter’s CPI could be a better indicator of economic recovery. 

Come to think of it, inflation just means too much money chasing too few goods, and should inflation stay above 2%, consumers will feel confident to spend more and take on more debt. This leads to increase in demand, and that increase could also mean more demand in online shopping or gaming, which in turns benefits tech stocks.

Thank you so much for spending time to read my blog and I really appreciate you. If you enjoyed reading my blog, hope you can support me by liking my Facebook page here or share my post. Currently, I do not earn any fees through any affiliate programme or sponsor. If you have any queries, feel free to post them and I am happy to take questions! :)

Portfolio Updates (March 2021)

 I wrote in my previous post that a stock market correction is imminent, just that I didn’t expect it to happen just right after I published my Portfolio Update. Seems like all eyes are on TLT – iShares 20 Plus Year Treasury Bond ETF now. The bond yield has been steadily rising since Aug 2020 but only started making waves recently. As trust in Covid 19 vaccines are growing, investors in general are betting on an economic recovery and setting expectations on higher inflation rate to come. That means they are expecting higher yield to compensate inflation risk. Higher treasury yield means higher risk-free rate, and that reduces the intrinsic value of growth companies when we apply DCF formula to value stocks.

Growth stocks, especially tech stocks which has not shown bottom line growth got hit badly. On the other hand, value stocks continue to hit new high as economies began to open.

 It has been a busy month for me so this time round, I will keep my post short and go right into updating my stock portfolio performance.

(1) Dividend Portfolio

(2) Growth Portfolio

Stock Portfolio: $452,767

Cash at Hand: $81,309

Total Portfolio Value: $534,076

Goals for 2022- 91.2% achieved

Goals for 2030- 13.66% achieved

Portfolio 1 Net Worth (Dividend+Growth) = $452,767

Portfolio 2 Net Worth = $189,786

Net Worth (Cash+Equity)= $723,862

My dividend portfolio benefitted from the gradual reopening of global economy. Bank shares performed well on the back of higher yields and economic recovery so I decided on taking partial profit on all three local banks. DBS at $28.263+36.42%, UOB at $25.93 +23.69% and OCBC at $11.561 +31.33%. Hence that is why I am sitting on a larger cash position compared to other months. Despite their high PE ratio above 14, I believe there is still room for growth. And one of the potential catalyst could play out MAS removes the cap on total dividends per share. Just 5 days ago, Fed lifted curb on bank’s dividends and share buybacks. We could see the same for SG banks too.

I also closed off my positions in Netlink Trust at $0.945 +0.37%  and trimmed 500 shares of HongKong Land at $5.91 -5.05% (after XD) and plan to divest as it continues its uptrend. I will be channelling the proceeds to build up my position in tech stocks and Reits. Despite rising inflationary pressure, I believe it will be short lived and likely peaked out in May ( I will explain in my next post). If you believe that low interest rate is the new normal and with economy picking up steam, REITS gives the best of both worlds. Because of that, I added Mapletree NAC at $0.985 and Champion Reit at HKD4.54. I continue to like REITS with reputable sponsors and still in a lookout for REITS which are still trading at attractive valuation. Let me know if you manage to spot any.

My growth portfolio seems to be undergoing a bloodbath event, with no recovery in sight. But I believe in being greedy when others are fearful. My strategy for these few months is to dollar costs average (DCA), and constantly adding small positions onto my existing growth stocks. As for Tesla shares, I look forward to loading up more of it when it breach below $600 levels. It’s a possibility considering the chip shortage which paralyzes car manufacturing and affecting Tesla’s production of semi electric commercial truck. The reasons to invest in Tesla are just too many to enumerate, and I will have a separate post to write about it in depth.

As I have a bank account in HK and sitting on cash, I started small positions on Sunny Optical Technology (Group) Co Ltd at HKD175.7 , Ganfeng Lithium Co Ltd at HKD101.40 and also BYD at HKD193 for Autonomous Electric Vehicles (A-EVs) play to best utilize the HKD. Other than DCA for Tencent Holdings, I will be doing DCA for Sunny Optical Technology (Group) Co Ltd and BYD.  The Total Addressable Market for FSV is huge and many companies i.e. Volkswagen Group, General Motors, BYD will all have a piece of the pie. I share the same thoughts as Elon Musk, where winner takes a quarter, still great!

I closed my position in Ping An Insurance at  HKD 97.042 +25.6% , DexCom at US364.217 +19.85% , Arista Networks at US273.463 +11.28% and Vuzix at US21.653 +44.05%. Looking back I regretted selling Arista Networks as it is more of a value play and should outperform other tech stocks peers considering that it has stable earnings with plenty of growth opportunities.

On the US side of the market, I also added Qualcomm at US129.484 for 5G play, Opendoor at USD27.098 and AirBNB at US199.266. I added back Palantir at US23.353 after selling off last month. This time, I got to lower my entry price with the aid of tech market rout. Data will be the most expensive commodity and its business value is unquestionable. Palantir has shown its ability to secure deals in the commercial space and its latest partnership with AWS could be a game changer. 

Other than the above updates, I have been averaging down on my existing shares. As long as Tech stocks continues its selloff, my portfolio overall growth will be quite limited. Nevertheless, the selldown will eventually stop and rebound and it most probably happens when investors least expect it.

During turbulent times like this, many may be left thinking if they should pull the plug to cut loss. Instead of asking what to do, probably a better way is to ask is: what not to do. And the answer is simple: do not fear. Panic selling in a bear market can indeed hurt your portfolio and its best to hold through your bear market. Or even consider applying this phrase: buying fear and selling greed. Easier said that done, but I see it as a good opportunity to load up shares which are unfairly punished by the market. The fear in the market will fade eventually and investors will regain confidence in tech shares if they report solid earnings in the coming quarters.

I have been investing in the stock market for 11 years and been through ups and downs in the stock market. All I can say is that the current tech sell-down is nothing close to a market crash but a healthy correction since share prices has gotten ahead of its fundamentals. There is no way to time the market hence its important to have a strategy in place if market turns sour to hedge against loss. In my case, I have a dividend portfolio which provides a cushion in the down market and quarterly dividends provides a good hedge against inflation.

If this market correction has caught you off guard, consider it as a lesson learnt and consider having an investing strategy and understand your risks tolerance. Investing is like running a marathon, and not about buying a few shares impetuously and expect gains in the next few days. Ultimately, your stock portfolio should be a SWAN portfolio, acronym for sleep well at night, regardless of how volatile the market turns out to be. If you are losing sleep over stock market, its time for some deep work and give your asset allocation a second look or probably sell your shares to the sleeping point. 

How did your portfolio perform this month? Did you mange to build up an 'all weather' portfolio!

Thank you so much for spending time to read my blog and I really appreciate you. If you enjoyed reading my blog, hope you can support me by liking my Facebook page here or share my post. Currently, I do not earn any fees through any affiliate programme or sponsor. If you have any queries, feel free to post them and I am happy to take questions! :)