I spent the last two weeks of August in Cornwall – along with half of London it would seem!
We went partly because my better half’s family is from there, but also because we didn’t want to risk the government’s holiday quarantine lottery. Having not had a holiday since January, I promised myself to turn off the work mobile and switch off properly myself, with the controls safely in David’s hands.
Sadly, hopes of beach lounging, fair weather walks and surfing were dashed as all holiday it blew a ‘hooley’ (Cornish for gale force winds). Storm Ellen in week one, Storm Francis in week two. We kept a stiff British upper lip, went to the beach and picnicked on the cliffs anyway. The red flag put paid to surfing, but that was probably a good thing as I still bear the scars (literally) from last time – in much calmer waters.
On my return to the office, it didn’t take long to spot that there had been something of a heatwave in US markets, particularly tech. The Nasdaq did the best part of 10% over the fortnight. We postulated why as a team: low interest rates, perceived COVID-19 beneficiaries, Robinhood retail investors, or the mushrooming number of tech-heavy ETFs finding their way to market. Whether they are simply headline index trackers like the S&P 500, where tech stocks are the lion’s share; environmental, social and governance (ESG) indices where many tech companies tick the right boxes; or the more gimmicky ETFs such as the Work from Home tracker. However, none of this was new news from when I left. Perhaps the answer was just all of them to varying extents, combined with less liquid summer markets that can produce greater volatility. Who wasn’t on holiday in August?
Subsequently, it appears these market moves might have been partially due to the heavy hand of SoftBank, which reportedly built up multibillion-dollar stakes in these tech companies through the options market. In this light it’s perhaps no surprise that these names have fallen back quite quickly. Yes, a 10% fall in the Nasdaq grabs headlines. But zoom out a little further: most of these shares are still trading above where they were at the start of August.
In the face of this market hooley, we are keeping it simple and sticking to our process. We trimmed some of the tech names, like Amazon and Adobe, from our multi-asset portfolio funds into the summer strength, banking some profits and maintaining our position sizing. There may well be further volatility in these companies. Many of them have performed very well as beneficiaries of the pandemic, low rates and high reliability of earnings. I’m not certain, but it seems that the recent price action was nothing more than the result of market technicals. The fact that they had a sharp down day on the same day that a setback in one of the leading vaccine trials was announced reinforces this notion.
While uncertainty over the path of the pandemic lingers, investors will continue to struggle with what the right multiple is for these generally more reliable earners. However, if we see further weakness, we would look to add to our preferred names. We remain focused on identifying what we think will be the long-term winners regardless of COVID’s longevity at sensible valuations, while avoiding pockets that look a little overoptimistic or even euphoric. The crisis has made my scepticism over expensive exercise bikes look a little misplaced. But you still won’t find that in the portfolio – or one in the garage!
Blog image by Will McIntosh-Whyte.
