The high flying global tech stocks are going through a correction phase after a blistering run since the stock market recovery due to COVID-19. The tech heavy NASDAQ has corrected more than 10% since the start of September and from the looks of things, the correction will continue as the market works off from the excessive bubble from the "Work from home" exuberance. The question is, will this spell the end of the tech rally as the world starts to recover from the COVID-19 pandemic and people started to emerge from their homes and head over to their offices to work?
The New Norm
As a result of the COVID-19 Pandemic, workforce around the world has been forced to adapt working from home and this has forced many corporations to relook the efficiency of working from home. This will no doubt change the office rental landscape around the world as corporations can now downsize their expensive office space and invest more into technological infrastructure that will facilitate better remote working and collaborations. Many employees are now working half the time at home and half at their office when face to face meetings are essential and this arrangement will probably stay around for the next 2 to 3 years as that is the timeline predicted by the experts for the COVID-19 vaccine to roll out and vaccinate a good proportion of the world population to gain a certain amount of herd immunity.
Hence in the next few years, tech companies will see decent revenue grow and smaller tech companies who are able to capitalize on the new environment will see their fortune rise in the next few years. Investment to technological advancement will accelerate into Virtual and Augmented reality and it may be entirely possible to conduct meetings in VR in the next few years as VR moves from entertainment to workplace and VR sets becomes smaller, cheaper and doesn't make you feel like puking after 10 mins of use. With the tech correction in force, this may be an opportunity to get into the tech sector and ride out the COVID-19 pandemic as this is now probably the safest and consistent sector to invest in.
How about Undervalue Industries?
As the tech sector surges ahead, other traditional industries such as energy, retail and travel are severely damaged by the global pandemic and is not expected to recover in the near term. Singapore Airlines, which is one of the most profitable airlines in the world, predicts that it will take 4 years for air travel to normalize, meaning that the stock prices are not expected to rebound in the immediate term as long as a worldwide implementation of vaccination is not completed in the next 1 or 2 years. These undervalued industries are definitely a good buy right now but investors will have to wait years for the value to be realize and there is also no guarantee that these industries are not permanently damaged by a change in working habits and traveling habits.
How do We Position our Portfolio?
This is a million dollars question as we do not have a history of a stock market behaving in a world wide pandemic as our guide. Given that we have an opportunity to enter into the tech industry at a more respectable valuation and our value positions in energy and oil will remain in doldrums for at least for the next few months, we will want to hedge our bets in both position that can produce consistent returns in the case of a prolonged pandemic period and the possibility of a burst of returns for the undervalued industries. With the picture clearer now than a few months ago, we are in a better position to ride out this cycle of global pandemic with a good return, especially in this negative interest rate environment.
I will also reduce the weightage of equities as valuation has become richer due to the recent stock market rise. However, I am reluctant to move back into bonds due to the negative interest rate environment as there are little expectations of returns as the US Federal Reserves indicates that the zero interest rate environment will continue into 2021.
The portfolio has made 2.69% - 3.71% for the month of Aug. However, I do expect that we will give back some of those returns in the month of Sep as the tech correction gets factored into the market. With the market taking a breather, it may be a good time to put in your SRS for the year and invest them into the market.
On the CPF funds, there is good news for investors as MAS has mandated that sales charge for CPF-IS investments to be set to 0% from Oct 2020 onwards and Advisory wrap fees to be set at 0.4% from the same period onwards. IFAST will also remove all platform fees of (0.1%-0.3%pa) for CPF-IS from Oct onwards. So if you have excess CPF-OA funds, you can consider investing them as the mandated low government fees will ensure that investors will benefit more.
This change in regulation will no doubt affect investment oriented advisors like me, but I strive to maintain the same level of portfolio management as before, just that I will need to work harder in the future to ensure that my investors are happy with their CPF returns and continue to invest with me.
In fact, I think this year, my CPF-OA portfolio returns have been remarkable so far with a year to date return of 18.54% return, and I hope to maintain this trend into the future.
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