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Stock Market Survival Guide (Part 2)

Updated: Jan 22, 2021

My Stock Picks

What Does All This Actually Mean for Investors

As a whole, we are obsessed with convenience. We always want a simple yes/no answer to all of life’s conundrums. We are a bullet-point nation, informed entirely on headline news. In a world drowning in information, we have an inherent need to cut through the bullshit. There isn’t enough time in the day to wade through all the available information and come to a fully informed decision for every potential move we make.


All I am trying to say from the above monologue is that my macroeconomic ramblings are not very conducive to our obsession with convenience and definitive answers, believe me, I know. I often get friends asking,

What stocks should I invest in now?

Or

Is now the right time to enter the stock market?

At which point, I typically veer off on some tangent about the sustainability of Monetary policies or the endless variables at play in today’s market. Out of the corner of my eye, I can see my girlfriend rolling her eyes — “just answer the f***ing question Mike,” or at least I presume thats what she’s thinking.


I wish it were that simple, if it were, I would surely be richer than I am now, but unfortunately, it is far from an exact science, and if you can accept this uncertainty you are probably in a better position than most. The truth is, no-one knows exactly what’s going to happen, so all we can do is invest in what we believe is the most probable outcome and diversify into asset classes that will protect you if your base case scenario doesn’t unfold.

In a world of endless possibilities, we must focus on the probabilities and work from there.

But, in an ode to my girlfriend (yes, true romance, I know), I have decided to bridge the gap between my highfalutin thoughts and the real world. More specifically, here are some of the better-known names currently on my watchlist that interest me for a variety of reasons.

Equities

In the Equity Market, pitfalls still exist, but we have already witnessed the emergence of the ‘stay-at-home’ winners with technology, communication services, and Health Care best positioned to take advantage of the current environment. For me, there are two main plays in today’s market. Future-proofed companies that have the capacity to grow regardless of the pandemic timeline is one. These companies tend to be more concentrated in the e-commerce, fintech, and automation space. Companies such as Arista, Pure Storage and Take-Two Interactive are some that I am currently drawn to.


The second potential play is a riskier, value move, looking to take advantage of the lower price point of specific stocks in the hardest-hit industries, namely, Airlines, Cruise liners, event organisers, and hospitality. Don’t get drawn into the value-trap here, most of the stocks within these industries are cheap for a reason. The only relevant question you need to be asking yourself for now is, will this company survive? With this in mind, there may be some longer-term value in the more prominent players like Disney. Despite over 50% of their revenue stream being eradicated in recent months, the growth of other sectors such as their streaming service, their sheer size, and the brand appeal should help them re-emerge relatively unscathed.

Bookings Holdings, the company behind the likes of Booking.com, Kayak, and OpenTable, is another one I like, granted their revenue stream has fallen off a proverbial cliff, and their share price may need to fall further before the story becomes genuinely compelling, but their minimal cash-burn rate relative to the other players in harder-hit industries ensures they have enough cash-on-hand to ride out the current evaporation of demand they are experiencing.


Kelloggs is a company that had been struggling long before the pandemic took hold as consumers transitioned away from cereals. In more recent times, Kelloggs has made a conscious effort to focus on its snack and meatless product range. If the expansion within these more profitable segments continues, the companies’ longer-term outlook will become a whole lot healthier.

Alternatives

As my faith in the longer-term sustainability of current monetary policies deteriorates, I have become increasingly interested in the likes of Gold and Bitcoin as a currency hedging play. With too much debt and not enough real growth, the current systems’ infinite ability to prop up aggregate demand in a bid to elongate our’ inflationary cycle’ is questionable at best. While the incentive structure will ensure that this structurally flawed approach continues to play out over the short-term, a longer-term currency hedging approach is still very appealing.


Gold Vs. Bitcoin

Gold has lived up to the billing as the ultimate store of value historically speaking. With a 7.5 Trillion dollar market cap it is a far more established asset class relative to bitcoin which currently has a market cap of $120 billion (bare in mind this figure may have changed dramatically in the time it takes to write this piece) which makes Gold the more sensible play for the risk-averse investor. For me, however, the sheer illiquidity of physical Gold is a significant deterrent, with larger orders potentially taking months to fill. While Bitcoin is not without its flaws, I feel it will be one of the major beneficiaries once governments realise they can’t endlessly prop-up economies through currency debasement. The mind-bending volatility that comes with it, is all just part of the fun.

Fixed Income

For fixed-income investors, monetary stimulus has created a challenging landscape, with safe-haven bonds offering interest rates of close to zero, all but eliminating their upside potential. As the economy moves past the CoVID-19 recession and begins to expand again, these interest rates will remain unattractive over the longer-term.


In High Yield markets, the market volatility of late has caused spreads to widen to their highest point since the Global Financial Crisis. While there may be individual opportunities in this space where careful selection can yield better returns, the potential for widespread defaults amongst high yield bonds is likely in the months ahead, so proceed with caution.


All-in-all, the fundamental changes to the fixed-income asset class as a result of monetary stimulus have continued to drive up bond valuation, effectively deteriorating the future returns previously on offer. The diversification benefits have not gone away, but longer-term investors may want to be underweight fixed-income as the economy re-emerges, opting instead for Alternative Investments such as precious metals, private equity, real estate, and venture capital.

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