500 legs better than four

John Templeton once said that ‘bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria!’ 

Although Templeton (who used his idea of the investment cycle to judge when to buy and sell) was referring to a good a few years of boom-bust, this cycle also seems to fit with what’s occurred for equity markets over the past 11 months – i.e. the excessive pessimism surrounding COVID-19 during late February and March, then the beginning of a rebound from April to the start of the summer (despite all the doubts surrounding the economic recovery) before breeding far greater optimism in the second half of 2020, replaced by euphoria since November until now, especially in the US big-tech, bio-health, and high alpha-beta sectors (the S&P500’s gains of almost 20% since the beginning of November are put into shade by Tesla more than doubling in that time (suspiciously similar to the speculative frenzy of the crypto world).

Two weeks ago we highlighted in an MBMG Flash that clients should take a look at China big-tech counter Alibaba (BABA) which had been aggressively sold down on Chinese regulatory concerns and since then Alibaba’s share price has risen 20%. We’ve now indicated that clients should exit this, as rebound has been so euphoric!

However, MBMG Investment Advisory doesn’t recommend that most investors sell completely out of equity, because, like the animals on George Orwell’s allegorical farm, not all (stocks) are ‘created equal’. With that in mind, we have turned our attention to the S&P500 High Dividend Low Volatility Index, tracked by index funds such as Invesco’s High Dividend Low Volatility ETF. The index comprises stocks that in general appear to have severely underperformed the S&P 500 due to two main reasons:

1. the outperformance of high-beta/pure growth/high momentum stocks such as US big-tech compared to the broader S&P 500;
2. pessimism and skepticism that COVID-19 has or will impact more physical businesses like utilities, infrastructure assets and property. While utilities have taken a hit and, for example, power consumption is down and not really showing signs of rebounding yet, but we expect that this is already priced in and the chance of more earnings downgrades and further reductions in dividends seems quite limited (as is evidenced by the rebound in the price of energy raw materials such as crude oil). A successful implementation of the Covid-19 vaccine is expected to improve sentiment for utilities as we’d expect power consumption to gradually rise as people begin to resume their old routines and return to a more typically pre-COVID life and work pattern.

The ETF’s current gross dividend yield of 4.6% is attractive relative to the Fed Funds Rate band of 0-0.25% and the coupon rate on US long-term government bonds of just 1.63%. Moreover; during 2017-8, the bull-run in utilities and infrastructure brought most of this big cap sector down to a yield of about 2% implying very significant upside* if such an environment was to return with interest rates remaining at current low levels – something we view as highly likely, almost inevitable

Invesco S&P High Dividend, Low Volatility ETF USD – What sectors does it comprise of?

Source: Invesco S&P 500 High Dividend Low Volatility ETF

How can I invest?

MBMG Investment Advisory provides cost-effective research not only on asset allocation and security selection but also on the most fee-friendly and tax-efficient platforms through which to invest into funds, stocks or other assets. Our unique model has evolved whereby in return for a single engagement fee, we work alongside our clients, in a fiduciary model (i.e. we do not and cannot accept commissions or kickbacks as we work only for our clients and not for institutions or product or service distributors).

We focus on providing highly personalized, risk-appropriate advice, that helps create portfolio performance that is within each client’s acceptable range of outcomes in all market conditions. This is achieved through genuine diversification of asset classes and investment methodologies (i.e. what kind of investments to invest into and how they’re invested in) rather than just superficial diversification at an individual stock level.** 

*All other things remaining equal (which of course they rarely if ever do), an asset yielding 4% dividend would have to double in price for the yield to fall back to 2%.

** Owning 4 different stocks isn’t necessarily diversification if they all share sufficiently common characteristics that they react in the same way to events.