Investment Matters

Winners and losers in November

The market concluded the month of November on Monday having posted the largest single-month gain (+10.16%) since the Christmas rally of 1993 (+8.3%).

As mentioned last week, this is the largest gain seen since March of 1988 (+13.2%).

And while the headline number reflected positive news regarding the efficacy of the three lead vaccine candidates and the conclusion to the US presidential race, a dissection of the returns seen in November reveals the a market rotation into stocks that have underperformed over the past year is well underway.

First Samuels’ clients were positioned for such a rotation, which contributed to the 2.4% outperformance seen in November.

We look “inside of the stock market” to identify the winners and losers of this shift: by sector, style (value vs growth) and theme to identify what worked, as well as what did not.

By sector

The winners – Energy, Financials, Telecommunications and Real Estate

November saw a large rotation into sectors that have lagged in performance as well as those hardest hit by the pandemic. Typically, these were cheaper sectors, where there was some trepidation as to the impact of a prolonged interruption to normal activity.

Broadly, clients of First Samuel benefited from a tilt towards these sectors leading up to November.

Financials (+16%) were buoyed predominantly by a large recovery of the big 4 banks. The prospect of an effective vaccine augers well for a return to normal activity sooner and lessens the prospect of loan defaults and subdued loan growth.

We built a moderate position in NAB (+25%) and ANZ (+22%) over the year, as their prices declined well below levels we saw in the past decade. We have been pleased to see both banks not only recover but outperform the broader sector over this time. QBE (+21%) was another strong performer within the sector.

Energy (+29%): The pandemic has resulted in a dramatic decline in the demand for oil, particularly transport-related consumption – which constitutes approximately 60% of oil demand globally (Source: Rystad Energy). News of a vaccine has meant a faster rebound in demand for aviation fuel as well as passenger vehicle traffic and has been positive for the oil price, which rose by 26% over the month.
Client portfolios benefited from this through positions in Worley (+37%) and Origin (+30%).

Real estate (+13%): There has been much unease as to both the short and long-term impact of the pandemic on the real estate sector. As the pandemic hit, we saw a sharp increase in rental deferrals and abatements across the real estate sector. The already fragile retail property sector was particularly hard hit, with several companies forced to raise capital and find sources of liquidity.

While the recovery in prices was pleasing, we remain cautious. It remains to be seen whether we will see long term changes in preferences and behaviours that impact the sector (working from home, shopping online), and how this will translate to rental uplifts, incentives and demand for office and retail space in particular.

Clients of First Samuel benefited from a repositioning towards Real Estate equities in their property allocation over this period. Strong performers included global retail REIT Unibail-Rodamco-Westfield (+73%), Mirvac Group (+22%), Stockland (+18%) and Home Consortium (+18%).

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The losers (in a relative sense) - Consumer Staples, Utilities, Healthcare and Technology

Conversely, sectors that were defensive and had momentum during the pandemic rose, but were more expensive, rose to a lesser degree.

First Samuel clients' entered November with a lower exposure in Healthcare and Information Technology stocks as well as a modest exposure to Consumer Staples.

Utilities offer largely safe, stable demand and largely regulated returns. With the economic outlook improving and rising interest rates, the “bond-like” profits produced by these companies became less attractive.

Healthcare stocks were a place of refuge for investors but were generally more fairly valued overall.

Consumer Staples benefited from strong demand during the pandemic but again were more fairly valued overall.

Woolworths (-3%) is a moderate exposure in the portfolio and underperformed during the period.

Technology stocks enjoyed a monstrous rise during the pandemic, spurred by step change shifts in customers as well as general momentum. With value hard to find in the sector, we saw technology broadly underperform.

We have progressively trimmed clients’ exposure to the technology sector over the year, as their prices became stretched relative to our valuations. Clients’ small holding in Pushpay (-18%) underperformed over the period fell but remains one of our picks due to the company’s prospects for future growth.

 

Value vs growth

We have seen momentum in the long-awaited rotation into ‘value’ stocks. Clients of First Samuel have been positioned with portfolios that have a value orientation. 

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The rotation saw investors moving back to more cyclical sectors, which have looked cheap relative to ‘growth companies’ on the basis that we see a resumption in economic activity.

Several ‘value’ positions in client portfolios benefited during this period, including value assets managers Perpetual (+23%) and Platinum Asset Management (+36%), as well as EarlyPay (+15%) and Emeco (+37%).

COVID beneficiaries vs COVID impacted

The most dramatic disparity in November performance was that between ‘COVID beneficiaries’ and ‘COVID impacted’ stocks.

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‘COVID beneficiaries’ include basket of stocks includes companies such as JB-HIFI, Resmed and Kogan, who benefited either directly from COVID related demand or stimulus employed shortly after the pandemic hit.

The ‘COVID impacted’ basket includes companies particularly hard hit by the pandemic including stocks in the travel, leisure and retail sectors.

While the divergence we saw in November was to be expected, the sheer magnitude highlights that market fear and extrapolation can lead to favourable potential for returns, particularly when this risk is spread amongst a diversified portfolio.

We saw merit in having some exposure to ‘COVID impacted’ companies, which has paid off over the month in holdings such as Webjet (+65%), Regis (+70%) and Lovisa (+38%).