We’re adding tech stocks to the Growth Portfolio, here’s why…



As the market stages a relief rally, we’re hedging the Growth Portfolio by entering new positions in key tech stocks


In recent weeks, our portfolio strategy has focused on selling put options, as well as leveraging foreign exchange movements in the AUD/USD.


While this strategy has proven resilient and helped the International Growth Portfolio significantly outperform US indexes, we are now starting to see some positivity return to the market based on the idea there might be light at the end of the tunnel.


As means to hedge our cash holdings, we are adding select positions to leverage any potential upside if the market keeps climbing.

What we see as potential catalysts


Even though this pandemic has a long way to play out, and we remain cautious around new daily case numbers in the US that appear to be plateauing, we are witnessing one theme that could potentially help guide the economy through these tough times. That is, a unified response from the government and Federal Reserve.


The two entities are showing a heightened level of sensitivity to the broader state of the economy and seem to be in lockstep. In fact, they have set aside differences that were prominent late last year and stepped into overdrive. Both the government and Fed have signalled they will do whatever it takes to mitigate the economic crisis.


There is no better sign of this than last Thursday’s move by the Fed to pump another US$2.3 trillion into the US economy in an attempt to prop it up. Among key initiatives outlined, the Fed will buy up to US$600 billion in loans through its Main Street program, offering eligible businesses 4-year loans. It will also offer states and municipalities up to US$500 billion in loans by purchasing municipal bonds, in addition to junk bond ETFs.


This all comes on top of the first tranche of US$2.2 trillion in stimulus spending. That program included cash payments for workers and the unemployed, as well as an extension of finance to small businesses and companies deemed critical to national security.

Despite the fact that unemployment is set to skyrocket, in light of government spending economists from the National Association for Business Economics expect personal consumption expenditure could remain positive. This is based on an expectation that individuals will still be buying necessities.


Beyond spending, another key initiative that we believe could provide some breathing space to individuals and businesses is the treatment of US income taxes throughout 2020.


The IRS has extended the federal tax deadline from mid-April to July 15, while all states have postponed their income tax deadlines as well. Furthermore, all penalties and interest on federal tax payments up to $1 million for individuals and $10 million for businesses during this period will be waived. This delay is likely to help workers and businesses manage their cash flow.


More importantly, however, President Trump has also raised the idea of a payroll tax holiday for the rest of the year for both employers and employees. Despite two massive stimulus programs involving cash payments and loans, a payroll tax holiday is still being favoured by the President as recently as last week.


If this proposal were to come to fruition, a payroll tax holiday would effectively help buoy cash flow and liquidity for businesses and workers. Furthermore, it could incentivise employers to bring forward economic activity into 2020, which would help retain jobs or even kick-start new hiring. Under these circumstances, we would expect the market would react positively to the news.

The positions we are buying

An unprecedented level of government spending has given rise to some optimism in the market, with stocks up nearly 25% from their low.


As we’re cautiously re-entering the market some margin