Portfolio Update May: Stocks tumble as ‘Sell in May’ takes hold

Portfolio equities outperform broader market, while index and forex hedging limits NAV losses to 1.8%

As they say, eventually all good things must come to an end. And so, after US markets enjoyed the best start to a year in two decades, the stock market fell sharply. In the end, we saw a sizeable drop across the board wiping out at least the last couple months of gains. By May 31, the Dow Jones recorded six straight weeks of losses, its worst streak since 2011.

Although attention initially focused on subdued inflation and the Federal Reserve’s decision to keep interest rates on hold, markets started to stall as data pointed to jobs growth accelerating more than anticipated.

However, the limelight quickly moved to the almost forgotten issue of the US-China trade war. After all, like we said previously, everything seemed to be priced for perfection, but were investors guilty of sitting in a blissfully ignorant state?

The answer soon became apparent as not only did trade negotiations break down, but billions of dollars in new tariffs took hold. What can only be seen as a battle of gamesmanship, each party has taken turns swinging for the fences to secure its national interests. But like a good drama, it doesn’t end there. Lingering are touted restrictions for US tech companies dealing with Huawei, which only serve to fan the flames.

Where do we see things going from here? This is one situation where there is more going on behind the scenes than everyone is privy to. Both sides must keep their cards close to their chest. It’s in no one’s interest that talks disintegrate altogether, and we don’t see that happening, but we may have to settle in for a potentially bumpy ride. And if that wasn’t enough, Mexico getting caught up in fresh trade tariff threats could be the next point of consternation.

Retailers show resolve…but it’s no good in a tough environment

After the banks and tech favourites kicked off the latest round of earnings in April, this time it was mostly retailers on show. And somewhat surprisingly, they reported reasonably well, if not unfortunately caught up in the tumultuous trade saga that hurt index performance.

Macy’s (M) kicked things off with earnings that smashed all estimates, including our own.

Despite falling sales, the company’s push to drive home its online commerce platform is helping boost its earnings profile. Better attention to the ongoing store network has also driven same-store sales growth, which, we had disregarded. As revenue continues to fall, we’re still not convinced the refresh strategy will have legs. In an increasingly uncertain retail environment, there is only so much in terms of costs that can be stripped from the business. Despite the improved result, shares fell 12.6% during May.

Walmart’s (WMT) sales grew strongly but just missed estimates. Earnings however, still came out ahead and the stock only fell by 1.4% in a tough month. The big-box retailer’s investment into technology is sure to help advance its competitive position in the market. Like Macy’s, online sales are the key growth pillar and we see more runway for the company here. Not to mention, the integration of its acquisitions will provide other income channels.

Elsewhere, Home Depot (HD), Target (TGT) and Costco (COST) all managed to produce earnings beats. Sales performances were mixed among the trio, with poor weather serving as a challenge for Home Depot. Ironically, this headwind wasn’t a problem for Target, who saw a large jump in foot traffic. Despite its shares being down by as much as 8.6% at one stage during May, Target ended the month 3.9% higher thanks to strong growth in its same-store sales, online sales, plus transaction volumes and sizes.

Chinese e-commerce giant Alibaba (BABA) defied the ongoing trade dramas to comfortably record better-than-expected sales and earnings. The rate at which the company is growing still continues to surprise, with every sign its efforts to focus on customer behaviour is bearing fruit. Cloud computing is one of its segments growing at a rate of knots, set to underpin our expectations for continued revenue growth over some time.

Tech players also featured, with Nvidia (NVDA), Dell (DELL) and Cisco (CSCO) all reporting. Each of the three were hammered in May, the worst being Nvidia, whose share price plummeted 25.2%. Having met and even beat some expectations for the most recent quarter, it was the downgraded outlook and competitive challenges in the gaming sector that frightened investors, including us. After a great showing, the stock may have made its run.

Portfolio Performance

Although there was a sizeable slide in equities during May, we were able to limit the decline in the portfolio Net Asset Value (NAV) to just 1.8%. Once again, underlying performance was ahead of the major indices, this time by a notable magnitude given the three bourses fell between 6.6-7.9%.

The equities component of the portfolio fell 3.8% compared to the ending NAV from April. Losses were headlined by Alibaba, Apple (APPL) and Skyworks Solutions (SWKS). Notwithstanding impressive reports from BABA and APPL, the former declined by 19.6% and the latter declined by 12.8%. Meanwhile, SWKS tumbled 24.4%.

All three stocks are highly susceptible to US-China trade anxieties. As we expect that to continue for the time being, short term gains may be limited. Nevertheless, the fundamentals of each business remain strong and we’re confident in their ability to weather near-term volatility. No new positions were entered into during May, nor did we close any.

Zillow Group (ZG) had a tremendous month, soaring 27.5% and contributing strongly to our portfolio. In its quarterly report the online real estate database showed it has lifted sales considerably, while also managing to come in ahead of forecast losses.

We took out a partial hedge at the beginning of the month against the S&P 500, knowing that we could protect some of the portfolio if the market soured. This futures contract provided a positive contribution of 0.6% to the portfolio NAV.

As no trades were conducted through the month, realised income was not recorded. There are still modest gains of 1.6% of the portfolio’s starting NAV sitting as unrealised income.

Another aspect contributing to the portfolio’s outperformance last month was our currency hedging. The USD/AUD forex rate increased from 1.4185 to 1.4414, which facilitated NAV growth of 1.5%. By month’s end, cash represents 10.6% of all assets, a slight increase against the month prior.

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