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 off the low, we are exercising careful discretion in the opportunities that we are reviewing and adding to the Growth Portfolio. More specifically, we are looking to leverage themes that are conducive with current state of affairs, including the prospect that conditions deteriorate further.


With this strategy in mind, we are looking to invest in companies that tie in with the theme of remote working, whereby office workplaces have been harnessing technology allowing employees to work from home. What’s more, the companies pioneering such solutions are among those we perceive as less likely to be affected by the pandemic on account of not relying on an office-based workforce.


Based on this trend, we will be taking up new positions in Amazon (AMZN), ServiceNow (NOW), Atlassian (TEAM), Slack Technologies (WORK), Microsoft (MSFT) and Zoom (ZM).

In addition, we also see the distinct possibility of a growing acceptance among US consumers in shifting away from cash transactions, which have proved to be a source for spreading a virus like COVID-19.


In the short-term, this theme is likely to see increased payment volumes pushed through ‘contactless’ digital payment technologies. However, there could also be benefits over the long-term as individuals change their behaviour, be it with or without a prompt from the government.


Our interest here means that we will be buying stock in Visa (V), Mastercard (MA), PayPal (PYPL) and Square (SQ).

Maintaining an agile investment strategy

It’s important that we remain active in the market, even amidst the volatility that has made trading difficult. These conditions, however, are what also afford us opportunities, which we need to be responsive to.


With the USD now starting to pare its gains as the US government and Fed roll out an unprecedented level of economic support, there is a need to hedge our portfolio.

A rising market affords us an opportunity to hedge the portfolio. However, it is the specific types of companies that we are selectively buying, which will provide us exposure to attractive themes emerging at this present time.

Contact

T: 02 8379 1868​

E: info@kauriam.com.au

Physical Address

Level 8, 25 Bligh Street

Sydney 2000, NSW

Australia​

Postal Address

GPO Box 2348

Sydney 2001, NSW

Australia​

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© 2020 Kauri Asset Management

Castlereagh Financial Group Pty Ltd ABN 76 604 407 516 Trading as Kauri Asset Management is a Corporate Authorised Representative (No. 1275519) of AFSL Holdings Australia (AFS License No. 460 940). Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situation or needs except in circumstances where you have provided your personal financial details via our online application process and received a Statement of Advice from us. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate taxation and legal advice. Please read our Financial Services Guide before deciding whether to obtain financial services from us. © 2020 Kauri Asset Management