Saxo Morningstar Moat USD Q4 2020 commentary

Saxo Morningstar Moat USD Q4 2020 commentary

SaxoSelect Commentaries
Saxo Markets

Instruments traded
Stocks
Asset classesGlobal equities (excluding emerging markets)
Investment styleHigh quality stocks offering attractive dividends 
Dividend Yield
 1.9%
Quarterly return50.6% (net of fees)
Annualised volatility (since inception)23.8% 

Market overview

Who would have thought we’d be here, in early 2021, with peak global COVID-19 cases, a terribly weak economy, and near-record high markets. For humanity, we are gladly waving goodbye to 2020, but for markets we have endured a period of surprising benefit. Global stocks, corporate bonds, real estate, gold, commodities, and even bitcoin have all moved forward and delivered positive performance. 

In this regard, the final three months of 2020 was a strong one by historical standards—which did have some substantive developments. It is a clear case of market participants looking over the horizon, with the vaccine rollouts combining with a perception of greater political stability. The wave of “good news” comes with many fascinating and constructive sub plots. One of the most interesting happened in the fourth quarter of 2020, where small-cap value stocks bucked a multi-year trend to join the winner’s list. This was partly marked by President-elect Biden’s victory (the so-called blue wave) but is also a vision for life after lockdowns—with the reopening of the economy considered a positive for economically-sensitive and cyclical stocks. Company defaults and bankruptcies also remain low globally, defying the doomsayers, supported by record stimulus and the cheapest borrowing rates ever seen. This last point cannot be underplayed, with corporate bond spreads tightening to the lowest levels in history, perhaps reflecting expectations that a return to economic normality is still a long way off on the horizon.

Here are some of the fourth-quarter and full-year 2020 highlights:

  • Global stocks rose meaningfully in the fourth quarter, finishing 2020 with healthy overall returns given the circumstances. At year-end, the U.S. market had rallied as much as 70% from March lows.
  • Dividend stocks bounced back strongly in the fourth quarter but lagged the broader market for the year. Likewise, emerging-markets stocks outperformed developed markets during the fourth quarter. 
  • Despite a fourth-quarter rally, energy stocks were the worst-performing sector for the fourth consecutive year. At the other end, consumer cyclical and technology stocks soared.
  • Small-value stocks topped the Morningstar Style Box in the fourth quarter, but value stocks still trail growth stocks by massive margins for longer time frames.
  • Among fixed income, interest-rate-sensitive bonds were one of the rare assets to fall in the fourth quarter. Meanwhile, riskier high-yield and emerging-markets bond categories performed the best.
  • Inflation hedges, such as inflation-protected securities and gold, all had a strong 2020 while safe-haven currencies suffered.

Exhibit 1: The breadth of the strong equity performance has been noteworthy, with the fourth quarter rally pulling most global markets into positive territory.  

global_market_borometer

 

Portfolio performance (net of fees)

Oct1.8%
Nov
33.8%
Dec
10.5%
2020
28.6%
Since inception (Jan 2017)
 70.6%

Top 10 portfolio holdings (as of 31/12/2020)

41.4% of total portfolio

NameWeight (%)
Nordstrom Inc5.35
Sabre Corp4.50
Baidu Inc ADR4.45
Lyft Inc Class A4.20
Tapestry Inc4.01
WESCO International Inc3.88
Adient PLC3.86
Core Laboratories NV3.79
Livent Corp3.70
Rolls-Royce Holdings PLC3.63

Top Performers (Below performance figures are total return Q4 USD):

  • Rolls Royce Holdings PLC. Share price went up 163.7% in Q4 and according to Morningstar proprietary analysis, the stock trades at a premium to fair value. The position has been sold in the latest rebalance as the team believes that the outlook for Rolls-Royce and the successful implementation of its long-term growth strategy appears to be highly uncertain.
  • Nordstrom Inc. Share price went up 161.8% in Q4 and according to Morningstar proprietary analysis, the stock trades at a discount to fair value. The investment management team believes that although Nordstrom has been greatly impacted by Corona virus, its brand power should hold.

    Nordstrom is a fashion retailer that operates approximately 100 department stores in the U.S. and Canada and approximately 250 outlet stores under the names Nordstrom Rack and Last Chance. The company also operates e-commerce sites. Nordstrom’s largest merchandise categories are women’s apparel (31% of sales) and shoes (24% of sales). Nordstrom, which traces its history to a shoe store opened in Seattle in 1901, continues to be partially owned and managed by members of the Nordstrom family.
  • Livent Corp. Share price went up 110.03% in Q4 and according to Morningstar proprietary analysis, the stock trades at a discount to fair value.

    Livent is a pure-play lithium producer formed when FMC spun off its lithium business in October 2018. Livent should benefit from increased lithium demand via higher electric vehicle adoption, as lithium is a key component of EV batteries. The company's low-cost lithium carbonate production comes from brine resources in Argentina. Livent also operates downstream lithium hydroxide conversion plants in the United States and China and has a 25% stake in a fully integrated Canadian lithium project.
  • Adient PLC. Share price went up 100.6% in Q4 and according to Morningstar proprietary analysis, the stock trades at a discount to fair value.

    Adient is the leading seating supplier to the industry with about one third of the global market as well as a dominant share in China of about 45%. Operations in China are accounted for under the equity method so most revenue there is unconsolidated. Unconsolidated seating revenue from joint ventures totalled $9.5 billion in fiscal 2020. The company is headquartered in Ireland but has corporate offices in the Detroit area. Fiscal 2020 consolidated revenue, excluding joint venture sales, was $12.7 billion.
  • Tapestry Inc. Share price went up 98.8% in Q4 and according to Morningstar proprietary analysis, the stock trades at a discount to fair value.

    Coach, Kate Spade, and Stuart Weitzman are the fashion and accessory brands that comprise Tapestry. The firm’s products are sold through about 1,500 company-operated stores, wholesale channels, and e-commerce in North America (62% of fiscal 2020 sales), Europe, Asia (32% of fiscal 2020 sales), and elsewhere. Coach (71% of fiscal 2020 sales) is best known for affordable luxury leather products. Kate Spade (23% of fiscal 2020 sales) is known for colorful patterns and graphics. Women’s handbags and accessories produced 68% of Tapestry's sales in fiscal 2020. Stuart Weitzman, Tapestry's smallest brand, generates nearly all (98%) of its revenue from women’s footwear.

Worst Performers:

  • Bayer AG. Share price went down 5.75% in Q4 and according to Morningstar proprietary analysis, the stock trades at a discount to fair value.

    Bayer is a German healthcare and agriculture conglomerate. Healthcare provides just over half of the company's sales and includes pharmaceutical drugs as well as vitamins. The company has a crop science business that includes seeds, pesticides, herbicides, and fungicides, which was expanded through the acquisition of Monsanto.

  • VMware Inc. Share price went down 2.37% in Q4 and according to Morningstar proprietary analysis, the stock trades at a discount to fair value. 

    VMware, a majority-owned subsidiary of Dell, is an industry leader in virtual machines for data center servers and computer desktops. The software provider operates in the three segments of licenses, maintenance, and professional services. Customers include enterprises utilizing data centers, end-user computing, cloud providers, and software-defined networking. The Palo Alto, California, firm operates and sells on a global scale, with about half its revenue from the United States, through direct sales, distributors, and partnerships.

No other positions had negative performance in the quarter.

Outlook

With the big tail risks supposedly now behind us, many households continue to invest in earnest. In this regard, we seem to live in a two-pronged household dynamic, where a meaningful portion of white-collar households are saving more than ever (due to a lack of spending), while many others are finding it very tough.   

Looking to the future, investors must consider the risks they cannot see, or at least those they have not given weight to. For example, inflation and how we will ever unwind the record debt binge of 2020 could have untold consequences. Yet, above all else, investors need to weigh the valuations they are paying, as we have seen extreme divergences that presents both an opportunity and a risk. 

As Warren Buffett once said, “Only when the tide goes out do you discover who's been swimming naked”. We remain confident that our positions are in the best interests of our clients—acknowledging tomorrow’s challenges and working towards a prosperous 2021 with good financial decision making.   

Disclaimer

This material is provided for marketing and/or information purposes only. Fee charges mentioned herein are subject to change – you may find the latest updated pricing information on the description page for the respective portfolios. None of the information contained herein constitutes an offer (or solicitation of an offer) to buy or sell any currency, product or financial instrument, to make any investment, or to participate in any particular trading strategy. Saxo Capital Markets does not take into account your personal investment objectives, specific investment goals, specific needs or financial situation and makes no representation and assumes no liability to the accuracy or completeness of the information provided here. The information and commentaries are not intended to be and do not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort offered or endorsed by Saxo Capital Markets. Any expression of opinion (which may be subject to change without notice) is personal to the author and the author makes no guarantee of any sort regarding accuracy or completeness of any information or analysis supplied. Although every endeavour has been made to ensure that our trading platforms are secure and reliable, please note that as with all facilities and systems, our trading platforms may be vulnerable to temporary disruption or failure. If you undertake transactions on an electronic trading system, you will be exposed to risks associated with systemic failure, i.e. failure of hardware and software.  

See the full Managed Portfolio Disclaimer for more information. Please also consider our Risk Warning and General Business Terms before trading with us.

Saxo Markets
Most of our staff in Singapore are working from home to help limit the spread of the coronavirus. We remain at your service on the details below. Thank you for your understanding.

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.