Market Update- April 2021

The month of March ended with a short-term market correction with the bursting of Archegos Capital Management, a family office in the U.S. Though it was swift and the new month has started on some good notes with the global economic outlook turning positive. 

The global equity indices hiked by around 3 percent (reported as of 13^th April.) Along with that, for the U.S. market, for the same period, the impact of faster vaccine rollouts, mellow downed restriction, and the whopping $1.9 trillion pandemic relief bill has shown the charm. As s result, the U.S markets outperformed the rest of the globe. Higher quarterly report expectations can also be considered a huge factor for the U.S market with higher optimism of companies in reporting incomes.  

Market Movements so Far

Positive Economic Outlook

Vaccine rollouts and overall fading implications of COVID-19 on economies across the globe has led to an increase in real Gross Domestic Product of nations, with the U.S, Eurozone, and Global expectations improving by 9.8 percent, 11.9 percent, and 10.1 percent respectively as shown in the image below.

Treasury Yields and U.S Dollar

The U.S treasury yield, just like the last month has shown an upward tendency. At the starting of 2021, 10 years Treasury yields were marked at ~0.9 percent, which increased to 1.8 percent in March. It is currently trading at ~1.65 percent. Refer to the image below. 

Higher yields are a sign of inflation and inflation favours value stocks compared to growth stocks. The momentum of rising yield is anticipated to continue for quite some time now which may lead to growth stocks underperforming. 

With stronger strategic plans like Pandemic Bill and higher quarterly earnings expectations, U.S Dollar has gained its performing state back. It is lower compared to April 2020, but from December 2020, it has started to ameliorate. 

The Impact on Portfolio Allocation

Bond Holdings

The expectations of higher yields, followed by inflation have led us to reduce bond duration in our portfolio holdings. We have curbed our holdings from volatile and low yield bonds, preferring to have cash holdings to invest in better opportunities. 

Equity Holdings

For equity holdings, VAR has implemented four strategies as stated below. 

1. Taking Advantage of Market Correction

With the meltdown of Archegos Capital, we analysed a growing opportunity to invest in Tencent Music which we felt to be oversold due to the Archegos family office dislocation. We believe that it is a structurally growing company and undervalued, which may turn out to be a dark horse in the future.

2. Increased Allocation for Value Stocks

Value stock has been performing well over the expense of growth stock since mid-March. And as discussed above, a higher yield increases the weightage of Value stock over Growth. VAR has been keeping an equal ratio of Value and Growth since the last year ending, though, with the inflation anticipation, we have increased our allocation to Value stocks.

3. Event-based Investments

Our holdings in Bayer, Veolia, and Vivendi are some examples of event-driven investments. These types of investments are strategised to take advantage of special situations and possess a lower level of correlation with broader market scenarios, which serves well at the time of adverse market trajectory. 

4. Thematic Investments

Thematic investments refer to structural investment in an anticipated macro level, long-term trend. Investing in electric car manufacturing companies like Volkswagen or investing in pharmaceutical companies of tomorrow that innovates with technology like BB Biotech are some of the examples. VAR Capital portfolio reflects this strategy. 

Recent Stock Holdings by VAR Capital

Implementing the above mentioned strategies and keeping market shifts in consideration, we have taken buy positions in the following stocks. 

Tencent Music Entertainment

Tencent is a growth stock with analysts putting price targets around $32 to $35. VAR has invested in Tencent around $20, which provides an upside benefit of 60 to 75 percent. The company has recently declared a $1 billion buyback deal. In addition to that, Kerrisdale Capital (hedge fund) has also taken a long “chunk” position after the sell-off just like VAR.

S&P Global

Along with Moody’s and Fitch, S&P Global is one of the three leading credit rating agencies. S&P and Moody’s sums up for up to 80 percent of the U.S credit rating market. The company holds a good pricing power and exists in a higher barrier to entry industry. The business is growing at a rapid pace with significant revenue generation from alternate investments as well. Its merger with IHS Markit makes it a valuable opportunity to invest. 

Comcast Inc.

Passing over 60 million houses and serving around 28 million of them, Comcast Inc. is said to be the largest cable network company in the United States. Its strong EBITDA growth is a result of its high margin data subscribers (around 80 to 90 percent, in addition to EBITDA margins). The company has its own Netflix type streaming platform named Peacock. At present, the stock is underperforming compared to its peers, though this provides an upside potential for improvement and good returns. 

Bayer

At present, the company has 7.77x EV EBITDA and around 8x earnings, which is around 50 percent less than its peers. Though Bayer’s underperformance is due to its crop science division as a result of its acquisition of Monsanto in 2018 which also led to a lawsuit. The lawsuit is likely to get resolved this year. And the anticipation of a good agricultural cycle and its pharma division’s major launches in the medium term makes Bayer a good buy. 

Just Eat Takeaway Convertible Bond 

The company is one of the top global online food delivery marketplaces situated outside China with 1,55,000 connected restaurants in 23 nations. Its growth of around 15 percent brings triple digit % earnings for the company. It has a bond yield of 0.6 percent tied to its stock having an upside potential. 

The convertible bond is said to run a 0.7 percent yield income annually. Comparing the bond with the stock suggests that even if the stock goes down by 50 percent, the bond downside would only be 11 percent. While compared to the 17 percent upside of the stock, the number stands at 50 percent for the bond. That has been a major reason for VAR Capital to chose the bond over the stock.