The first week of March has done some damage to some of my portfolios, and while the damage isn't permanent - unless I choose to sell those positions at these lower prices, it can still be a rather unpleasant experience to see many hard won gains evaporate so quickly - mostly in companies where a fair bit of positive upside was already priced in. As usual, I'm mostly fully invested, as I'm mostly fully invested most of the time, and this time is no different, so there is a limit to how much additional capital I can deploy at these lower prices.
What I was doing in March and April last year was selling shares in companies that looked cheap to buy shares in companies that looked VERY cheap, so basically rotating a lot more capital into a few of the most unloved sectors. I didn't go for the airlines and travel agents, but rather the ones that I figured were likely to bounce back earlier, once there was a flicker of light at the end of the tunnel (and presuming it wasn't an oncoming train). In my case that meant mostly energy, mining/materials, and particularly mining services companies, and it was the mining services companies - as a sector - that provided my best returns in CY2020. Many of the ones I was loading up on in March and April more than doubled over the next few months. I also did well out of gold stocks for a period between April and July.
But that was so last year. 2021 is a different story, as every year tends to be. We've got inflation fears, rising bond yields, increasing share market volatility, a correction with the NASDAQ - being down -12.54% in 14 days, one of the fastest corrections in history for that index (a "correction" is a 10% fall), and after a horrible first week of March, our SPI futures were up over 100 points this morning (Saturday) after the NASDAQ fell 2.5% then rallied 4% overnight (on their Friday).
It seems much worse at the smaller end of the market, but here in Australia our market is only down 3.2% from the top. We are fortunate in this case to have Banks as our biggest sector (29.3% of the market) and a big Resources sector (21.2% of the market) going up rather than Information Technology (27.4% of the S&P 500) and Consumer Discretionary (12.4% of the S&P 500), two of the highly priced pandemic beneficiary sectors, going down. This could actually be one of those rare moments in time when the Australian market actually outperforms the US market. Purely because of the sector weightings:
S&P 500 Sectors (USA):
ASX200 Sectors (Australia)
I've highlighted IT there - being 4% of the ASX200 but 27.4% of the S&P500. Big difference! Huge! Also goes some way to explaining why our WAAAX stocks get so overpriced at times, because we are not exactly spoiled for choice when it comes to IT stocks listed here on our ASX. The US is home to the largest and most globally dominant IT companies in the world, and they tend to drive those index returns over there, because they are such a large part of the market. We are now in a scenario where punters have switched from extrapolating COVID tailwinds for IT companies into exponential future growth, to now thinking that way too much upside has been priced in, and with global COVID vaccine roll-outs happening everywhere, everything is likely going to be back to normal again soon. Whatever normal looks like. Typical market overreactions in both directions. That's on top of a general bearish undertone based on rising bond yields, which affects the "risk-free rate" on which stock valuations are based. Every alternate asset class (to stocks) that begins to look attractive again - including bonds, and eventually term deposits too once interest rates rise again, will most definitely affect how much people are prepared to pay for stocks. There is a view that we may be moving from a "there is no alternative for a half-decent return" situation to "there might be some viable alternatives emerging". In that light, when markets sell off, I can understand why the sectors that sell off the hardest are the ones that had run up the highest previously. Particularly if the market thinks the basis for some of that run up may no longer stack up as well as it did last year. Those sectors are now seen to have headwinds instead of tailwinds, and other sectors, such as the so-called "recovery play" sectors, now look far more attractive.
Over the past 17 days (13 trading days), since Tuesday 16-Feb-2021...
So, winners and losers, or sector rotation, depending on how you want to look at it. I have not been jumping on the big bank bandwagon, but more power to those that have, as you would have done very well relative to the vast majority of the rest of the market. These are broad brush strokes of course, and within every sector there are individual companies that perform much better or much worse than the sector average. However, I think these numbers do provide an interesting overview of which sectors have underperformed and which have outperformed over the past couple of weeks, and that could be worth noting if that trend was to continue, as trends often do, for a time. Not saying it will or will not continue, I don't know, but it might. The reasons behind it are reasonably clear, and those reasons probably won't change too much over the weekend. That said, we are set to open strongly on Monday, with our SPI futures up 100 points as of Saturday morning (today), and anything can happen, and probably will.
Probably best to concentrate on what we can control. In my case, that means finding and investing in high quality companies with proven management that can withstand a variety of adverse market and operating conditions and come out the other side relatively unscathed - if not stronger - and will continue to pay dividends throughout. Those are the companies that form the majority of my portfolios, and then I like to allocate some capital for some higher risk/higher reward companies as well. Choosing those very wisely has never been as important I feel. Because the downside if you get it wrong (or they do, which amounts to the same thing) can be considerable.