CIO tells WP his pandemic stocks winners and losers, and why it’s never been more important to look long term
The message to investors not to overact and focus on their long-term objectives is a well-worn trope, however much it might be true. Sadiq Adatia, CIO at SLGI Asset Management Inc., however, believes 2020 offers a prime example of why these principles matter.
If an investor had put their money in on January 1, he said, and then promptly fallen asleep for the whole year and woke up today, they’d be pretty happy with the outcome. For some, this will be the enduring legacy of the pandemic year.
He told WP: “If you can't predict things like that, then you can’t act on it in that way because by the time you act, it’s going to be too late. It’s okay to do that at the margin but not to go from exceptionally bullish to exceptionally bearish because by the time we get to bearish, things will be bullish again.”
The ability to view your investments from a risk-reward point of view is also vital. If you see some positivity from the government, that favours the upside, so add to your equities, for example. Adatia added: “It’s important to keep a longer-term focus, but also to understand when the risk-reward dynamics have changed. And if they’re not good, you need to be dialling the risk down.”
Adatia reflected on 2020 and, in particular, the moment in March when the market caved in. He is candid enough to admit he wasn’t expecting anything of the sort – in fact, markets, earnings, employment and housing were all looking very strong. Of course, no one predicted a global pandemic. By the time investors had realized the severity, the transformation from a bull market to bear market was complete, in just 15 days.
He said: “We stayed cautious even as the market started to rebound back, just because we didn't know. The risk-reward at the time was equally on the high side and the downside, and we just didn't feel like we wanted to play that game of flipping a coin.
“Then as we started to see stimulus packages coming in, knowing that governments would support interest rates being cut tremendously, then we started to feel that there was going to be a floor here, where as things got worse, you would get intervention coming in. That's when we started to add risk back into our portfolio slowly and gradually over time to the extent that today, we're overweight equities.”
As death rates increased in March and April, the seriousness of COVID-19 became apparent. From an investment standpoint, SLGI made swift moves. It moved its currency more to the U.S. dollar because, in risk aversion, the U.S. dollar strengthens, and it also made sure it was in geographies it thought were solid, going overweight the U.S. It also ventured more into work-from-home names, which obviously played out as the pandemic unfolded.
The other part of his immediate strategy was to ensure exposure to strong, long-term names that were equipped to survive and outlive weaker competitors.
Having hedges in the portfolio was also a central part of the plan, covering volatility around not just the expected second wave but also the U.S. election and social unrest.
“We’re now seeing positivity on the vaccine front and the worst-case part is behind us,” he said. “This is where we want to actually add risk, because we want to look six months to a year out.
“That’s where we started to add equities into our portfolios and as we got into Q3 and Q4, we started to rotate out of those winners of the technology space and into some of those areas that we thought will benefit from a vaccine and a return to ‘normal’.
“We still had what we would call the risk protection part of the portfolio, but then we started to buy opportunistic things in the portfolio for that longer-term gain. As the year progress, we started took more and more towards the opportunistic side, to the stage that we're at today, where we definitely have more of a tilt towards those value plays of the market.”
He added that, if you had money sitting around, March was a once-in-a-decade opportunity. Many of those stocks have doubled, with the likes of Tesla, Nvidia, Apple, Amazon at 50% discounts.
“If you’re a long-term investor, who cares if you don't get that bounce back a year from now. Those companies will do exceptionally well. You can be smart. They will be companies that will do exceptionally well and are good long-term investments that didn't have that much downside risk at that stage.”
The value of communicating with clients is something advisors are attuned to but Adatia urged them not to forget about being on the right side of a rotation when seismic events happen. It’s imperative to remind clients – and themselves of these opportunities.
With the vaccine now a reality, the CIO expects a rebound, with jobs hired back and small businesses able to get back on their feet again. Stimulus and household saving will also play into this.
“We feel that markets will go higher and it will be a good year, actually,” he said. “I would not be surprised to see a high single digit or even a double digit return in 2021 barring we don't get any negativity coming through on the vaccine front."
ADATIA’S COVID-19 INVESTMENT WINNERS
Technology, work from home, biotech
“I don't think [work-from-home firms] are going to be gone either,” he said. “ I think they will have a pullback, because you'll see rotation, but these are themes that will continue on for quite a bit longer.
“A lot of these companies have massive revenues, so it's a different situation than 2000 (tech bubble).
“As we look to the vaccine, you're going to see many companies that have got the vaccine will do well. They won’t kill it because you can't gouge customers and some of the money the government gave them in advance, so there's going to be a lid on it. But you will see more and more money being spent on health care by governments around the world to have things built in their own country, so that they don't rely on others."
INVESTMENT LOSERS
Travel, tourism, bricks and mortar retail
“Though travel and tourism did bounce back, they're not going to be able to bounce back right away, it's going to take time and people will take forever on the business side. From a vacation perspective, it will be a lot quicker - people are dying to take a vacation. It doesn’t mean their stocks won’t bounce back but their revenue won’t come back right away either.
"Then on the retail side, the bricks and mortar retail will have a difficult time. So, if you haven't transformed your business, it's a digital world and you're going to be dead. People will go to malls but not to the same extent because now they've got used to shopping online.”
