Feb 21, 2021
The first dose of COVID-19 vaccine was administered on December 14, 2020. Sandra Lindsay, an intensive care nurse at the Long Island Jewish Medical Center in Queens, New York, became the first recipient in New York and, likely, also in the U.S. This important event marked a historic milestone in the fight against a deadly virus that has taken more than 2 MM lives globally as of January 30, 2021.
While the human tragedy inflicted by COVID-19 will forever remain a painful and grieving occasion for the entire global community, the triumph of human spirit and the remarkable advancement of medical innovation during these difficult times will also likely go down in history as notable outcomes. As the chart below shows, COVID-19 infection rates (New Cases / New
Tests) have now again come back down to the 5% mark after spiking towards mid-teens at the end of 2020. The death rate (Cumulative Deaths / Cumulative Cases), meanwhile, has trended down from around 5% in Spring of 2020 to 1.7% as of January 30, 2021. Clearly, we are moving in the right direction although we do want to again emphasize that the human toll even in an improving situation is tragic.
Markets have been anticipating these developments since early summer of 2020. What started as a Federal Reserve and Federal Government dependent rally in April 2020, gave way to economic reopening expectations once the vaccine developers started outlining their development timelines. Indeed, as we laid out our expectations in the August 2020 update ( COVID Conundrum ), two vaccines were cleared by the FDA in December 2020 - Pfizer’s on December 11 and Moderna’s on December 18. It is truly remarkable that these vaccines have been developed within such a short period given the typical developmental time frame of around 5 years. What is even more remarkable is the efficacy rate of > 90% for both, indicating no compromise in the quality of the formulations despite the shortened time frame. The US medical community has truly risen to the COVID challenges.
As we move beyond the vaccine development phase to the actual administration and eventual immunity for most of the global population, the question foremost in our minds is not whether the authorities will be able to achieve this, but how quickly and efficiently. Evidence from the roll-out so far is mixed, but we remind ourselves that this is a mammoth task, perhaps never undertaken in history of the world. So, not only is patience of utmost necessity, but we might even have to accept failures in certain areas.
While we continue to monitor the vaccine roll-out closely, our attention is also focused on the leading economic indicators that might give us some sense of the trends as the economy drags itself towards our expectations of a full reopening. In that respect, air travel traffic data is one of our preferred indicators. The chart below gives us a glimpse of the pent-up demand there is for
travel. After plunging to less than 100,000 passengers during COVID restrictions in April/May of 2020, travel steadily rebounded to over 1MM towards the end of 2020…without any widespread vaccine availability. It is not unreasonable to expect a rebound to the normal level of 2MM passengers if enough people were vaccinated to feel it was safe to travel again.
If the extraordinary strength exhibited by risk assets since last summer is any indication, markets are already behaving like they have been VACCINATED!
Performance Review
Growth strategy
OppoQuest's GROWTH strategy (GROW) significantly outperformed its benchmark in 2H20. The margin of outperformance (+17.32%) is noteworthy and is the highest half-yearly margin we have achieved since inception. Technology, Commodities, and Banks contributed positively while Energy and Healthcare detracted. The top contributor was once again ROKU as the stock rose 159% in 2H20. Investors rewarded the streaming platform not only for market share gains but also for its growing moat which was on full display as it stared down AT&T (HBO Max) and likely received most of the terms it had demanded for carrying HBO Max. We think the untapped international opportunity is the next catalyst for ROKU and we remain very bullish on this story.
Nokia (NOK) was GROW’s main performance detractor as the stock declined about 10% for the period. We have commented on NOK multiple times before from both, positive and negative perspectives, and so will not go into the details again expect to say that NOK is no longer in our strategies. Its perennially disappointing execution was just not acceptable against an opportunity (5G) that remains extremely promising. We will be looking at other ideas in that space.
Moderate Strategy
OppoQuest's Moderate strategy (MODR) also outperformed significantly (+9.01%) but given its large-cap bias and partial income mandate, the margin was well below that of GROWTH. Transports, Commodities, and Consumer sectors contributed positively while Energy and Healthcare detracted.
Copper miner, Freeport McMorran (FCX), was the top contributor here as reflation expectations from more stimulus spending drove its stock price up 127% during 2H20 on the back of a +29% jump in copper price. We have viewed copper as the best positioned industrial commodity for the last several years given the supply constraints and steady demand growth. The sudden acceleration in growth expectations for Electric Vehicles (EVs) has substantially strengthened copper demand outlook which, obviously, has been immensely beneficial to FCX. Indeed, the move its stock price has made in the last 12 months has been nothing short of astounding. From a low of $4.85 hit on 03/17/20, it has traded more than $37 recently - that’s roughly 7x return in just under 12 months – too attractive a return for us to pass on. FCX has been fully monetized.
Similar to the GROWTH strategy, NOK was the biggest drag for the MODR strategy too. We are out of this position here as well.
Conservative Strategy
OppoQuest’s CONSERVATIVE strategy (CNSR) rebounded sharply in 2H20 and outperformed by 8.18%. Financials, Transports, and Technology sectors contributed positively with no negative contributions from any other sectors.
Invesco KBW Bank ETF (KBWB) was the top positive contributor for this strategy as the fund rose by around 35% in the half. This ETF has significant exposure to money center banks and with reopening expectations rising, banks have been among the major beneficiaries. The steepening of yield curve (10Y – 2Y) by 31 bps also contributed to the positive momentum.
As mentioned, there were no negative contributions in this strategy during 2H20. Recall that CNSR invests only through ETFs and does not take single stock positions. Hence, periods of no negative contributions are not uncommon for this strategy.
Outlook
This bull market in risk assets is starting to show signs of excesses. While investors typically look to stock valuations for indications of frothiness, we think there are two other areas that are currently flashing yellow – Special Purpose Acquisition Companies (SPACs) and Crypto
currencies. The chart below of IPOX SPAC index which tracks the performance of SPACs, is up
30% in January of 2021 alone. And since August 2020 it is up 90%! This is an index, not a stock – so the moves of such magnitude are not normal. Also for reference, SPACs are “blank-check” companies that are looking to buy businesses that are not yet public. Many of these SPACs are trading at a premium to the issue price just on the expectations that the sponsors will find not only an attractive business but also at a reasonable valuation to benefit the investors who have provided the capital. In effect, the index is reflecting future expectations of accretive acquisitions rather than exuberant expectations of specific businesses.
Given the performance sighted above, it is not surprising that SPACs have already raised $38 billion in the first six weeks of 2021. That’s almost half of the $83 billion raised in all of 2020. Previous year numbers are $13.6 B, $10.7 B, and $10 B for 2019, 2018, and 2017 respectively. So far, the SPAC market has not had a spectacular failure to deter new investors who seem to be the driving force behind it. While it might take some time, experience teaches us that the current situation is unlikely to end well. We find the risk/reward in SPACs very unappealing.
Crypto currencies are another area where we think investor enthusiasm has reached unsustainable levels. The chart below from COINDESK shows the price performance of the most
popular crypto currency – BITCOIN. Since February 2, 2017 when BITCOIN first hit $1,000, the price is up roughly 560x (times). In the first 50 days of 2021, it is up 93%! While acknowledging that we have missed the entire move, we think any asset appreciating this fast is fraught with huge downside risk.
That said, we also acknowledge that crypto currencies are not all hype. They do have a compelling fundamental case although it is yet to be fully tested. Supporters argue that in a world where fiat currencies can easily lose value, digital currencies are the best store of value because they are free from all government interference. Moreover, the supply is constrained so there is no risk of dilution and with a blockchain technology base, the security risk is almost non-existent. We agree with all these arguments, but we still think that the fundamental case for cryptos needs to be tested in a major risk aversion scenario.
Over the last 5 years there have been two major risk aversion episodes in the financial markets – fourth quarter of 2018 and the first quarter of 2020. In both those instances Bitcoin declined – by 45% and 50% respectively from its inter-quarter highs. While supporters could also argue that cryptos have not yet matured and hence this type of volatility is justified, we beg to differ. To us, all cryptos are behaving exactly like risk assets. They seem to do well only when risk taking is in favor. And so, while momentum is strong and the upside case may strength if the SEC allows crypto based Exchange Traded Funds (ETFs), we will wait for evidence that proves their stability. Meanwhile, we are exploring different ways to gain exposure to crypto activity without directly getting involved in them.
Notwithstanding the above excesses, we continue to be positive on the overall market because the two factors that underpin our outlook remain intact. They are 1) vaccination of the global population which will enable economies to reopen and 2) increasing signs that more fiscal stimulus is in the pipeline. We have already talked at length about the vaccine issue and so will skip repetition. On the fiscal stimulus issue, the new administration’s Treasury Secretary, Janet Yellen, was on tape recently and made a forceful case for an “infrastructure” package to hasten economic growth and make necessary long-term “investments.” This package would be in addition to the $1.9 Trillion COVID relief package that congress passed in January 2021.
So far, markets do not seem to be overly concerned about the spending that is being proposed or hinted upon. Yes, the 10Y Treasury yield has moved up notably from 0.50% in March 2020 to around 1.35 % recently. But it is still low enough that risk assets are not feeling threatened. However, if the yield crosses 2%, then we think market’s psychology will likely change. For now, though, the reopening trade is on track and all our strategies have healthy exposures to sectors such as Transports, Commodities, Industrials, and Banks – areas that will benefit immensely from the reopening as well as additional stimulus. Concurrently, we continue to reduce exposures of Technology and Healthcare – the two areas that have benefitted immensely from economic shutdowns. As of today, we have built at least 50% cash position in all our strategies and are patiently waiting for the next opportunity which we think will likely come after the economy reopens fully and the "infrastructure” stimulus plan is passed by congress.
Too far? It might be closer than it seems…stay tuned!
For OPPOQUEST
PARESH JAIN
Founder & Portfolio Manager