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Q1 2021 Portfolio Management

Q1 2021 Portfolio Management

Global stocks are entering 2021 in a broad uptrend, anticipating that re-openings and continued central bank accommodation will support a robust global economic recovery this year.

The sustainability of the advance in 2021 will be influenced by earnings and interest rate trends. Presently, negative real yields favor risk on assets like stocks over bonds, and cash-equivalents.

I remain overweight stocks and expect continued outperformance over bonds and cash for intermediate term. Equity positions are divided among cyclical stocks and long-term secular growth stocks. The yield curve is steepening which favors cyclical sectors such as Financials, Materials, Discretionary, Industrials, and Energy.

I am investing in economically sensitive areas of the market that perform well when inflation rises along with yields and earnings. Financials are relatively undervalued compared to most other sectors and could see stronger revenue growth this year on the back of loan growth and higher net interest margin income. Some cyclical sectors, such as Industrials and Materials, have been outperforming defensive sectors (Staples, Utilities) for months now, and continue to raise earnings guidance. I am still buying secular growing technology stocks on pullbacks that still provide higher revenue growth.

A full economic reopening would benefit small-cap stocks and value stocks. I’ve been adding to US small-cap as a “value” trade. Small-caps tend to see stronger earnings growth than Large-caps as the U.S. economy accelerates. Small-cap stocks are outperforming large-cap stocks over the last few months signaling a sharp pickup in economic activity is unfolding.

I am investing in foreign stocks particularly emerging market stocks. I expect Emerging Market equities to continue to perform well based on a weaker U.S. dollar forecast, and strong economic rebound in emerging market countries.

I am bullish on Gold as long as the US dollar remains weak and real interest rate are negative. The global reflation theme is gaining strength ahead of the likely economic broadening to come. Gold position is a better store of value when World Central Banks are printing money with recklessness, and an inflation hedge.

The global economic recovery is putting upward pressure on long-dated yields of safe haven assets such as Treasuries. I think Treasuries will be worst performing bond sector this year. I reduced Treasury position to absolute lowest levels in years. However, I am buying Treasury Inflation-Protected Securities which benefit from increasing inflation expectations, increasing production cost, and commodity prices. I also reduced the bond maturity of portfolios to lower interest rate risk, and increased credit bond exposure in areas of the bond market that tend to outperform as yields rise.

I am investing cash-equivalents in ultra-short-term notes that are adjusted upward in price based on inflation rate or changes in interest rates. This strategy will provide current income that will grow as rates rise and greater protection of principal than fixed investment options.
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