SINGAPORE (Jan 3): Alpha investing, or value investing, works. We proved it. But it is indeed hard work. It has been just over two years now since we started the Global Portfolio on Dec 18, 2017. During this period, we have seen our fair share of ups and downs.
For a quick recap, the portfolio started off very well in the first few months after inception, with returns rising as high as 10.6%. If you recall, most stock markets recorded strong gains in 2017 and entered 2018 on a veritable tear, on expectations of a synchronised global economic growth, in both developed and emerging countries.
Those forecasts unravelled quickly, however, after US President Donald Trump announced plans to impose 25% tariffs on US$50 billion worth of Chinese imports in April 2018. That kick started a string of tit-for-tat tariffs between the two biggest economies in the world. Stock markets globally reeled. The Global Portfolio ended 2018 down more than 20%.
Clearly, we had our work cut out for us. At the beginning of 2019, we held five China-based stocks (accounting for 54% of total portfolio value), three US companies (20% of portfolio value) and one Japanese stock (12% of portfolio value) in the portfolio.
Within weeks, it was becoming clear to us that the Chinese economy would continue to downshift, owing partly to the worsening trade war. The Chinese government was also reining in risky credit activities and excessive leverage. The credit tightening is aimed at preventing systemic risks and asset bubbles — but also had the effect of slowing investments and growth.
At the same time, we were increasingly convinced that the US economy would be among the most resilient in the world — despite the then widespread fear that the US would succumb to recession, dragged down by slowing manufacturing activities and weakness in Europe and Asia, including China and Japan.
Why? Because consumer spending accounts for more than two-thirds of GDP and the average US household is in pretty good shape. All of the data — on house- hold debt and debt servicing, savings rate, interest rate and the labour market — was supportive of stronger consumer consumption.
Consequently, we sold all our non-US-based stocks save for Alibaba Group Holding. Proceeds were invested in the US market. In particular, we got in early with consumer-related stocks, including Builders FirstSource, The Walt Disney Co, Home Depot and Dollar General.
This strategic move paid off handsomely over the ensuing months as more investors jumped onto the US consumer bandwagon. Total portfolio returns returned to positive territory and went on to outperform the benchmark index.
In fact, the Global Portfolio gained 47.9% last year, well ahead of the 27.9% rise in the MSCI World Net Return Index as well as the 30.1% total returns (including dividends) for the Standard & Poor’s 500 index. Total returns for the Dow Jones Industrial Average was 24.7% in 2019.
This result was achieved without any leverage. This is a simple, long-only portfolio — in other words, no shorts, no options, no derivatives and no leverage. Why? Because we are here to help the small investors and prove that alpha, or value, investing works.
We did make one big mistake last year — we sold Apple, succumbing to fears that the trade war tension would worsen and pressure iPhone sales in China, one of its most important markets outside of the US. Apple shares went on to hit an all-time record high.
Most recently, we made another major strategic move — to lock in profits on our consumer-related stocks, which have rallied, and switch into cyclical stocks. Our focus remains on the US market, which we believe will continue to outperform, at least in 1H2020.
We maintain our upbeat outlook for the US economy, which is why we adopted the more aggressive positioning for the Global Portfolio. We invested in building materials distributors BMC Stock and Builders FirstSource, The Boeing Co as well as financial stocks JPMorgan Chase and Comerica. Over the last few months, we have also doubled our holdings in Alibaba. The portfolio is now nearly fully invested.
US consumption remains healthy on the back of a strong job market, and investments should regain traction in 2020. Interest rates and inflation are expected to stay benign. Housing demand is strengthening on the back of low mortgage rates. The steepening of the yield curve suggests that the worst of recessionary concerns have receded, at least for now. We will discuss this subject in greater detail in the near future.
There are also signs that manufacturing activities and global economy may be bottoming. And at some point, we will see a return of foreign investor money into emerging markets. It is too soon to tell, but it could happen in 2H2020. We are keeping a close eye on this.
The Global Portfolio lost 0.6% for the week ended Jan 2. All of our recent acquisitions are faring well, except for Boeing. Its share price has been volatile as the market vacillates between positive and negative on when the 737 MAX will return to service.
Last week’s gains pared total portfolio returns to 17.9% since inception. The portfolio is outperforming the MSCI World Net Return Index, which is up 16.6% over the same period.
Tong Kooi Ong is the chairman of The Edge Media Group, which owns The Edge Singapore.
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