Friday Market Insights – Market pivots towards economically sensitive stocks from the big tech winners

Sue Talbot: [00:00:06] Hi, everyone, today is Friday, November 13th. And welcome to week one of the Friday Market Insights video. My name is Sue Talbot and I’m a partner and portfolio manager here at Genus. And I also have Mike Thiessen with me. Mike is also a partner and the director of Sustainable Investments at Genus. So let’s get started, Mike. It was a pretty busy week in the markets last week and starting off on Monday when Pfizer announced that it had developed a vaccine that was 90 percent effective against the coronavirus. So on Monday and Tuesday, we saw investors rotate out of the high growth tech names, what we’ve been calling covid winners, and into the more value cyclical names. And so can you explain why investors would rotate out of growth and into value based on this positive vaccine news?

Mike Thiessen: [00:00:58] Yes, so investors are really bidding on a post covid recovery and in a post covid recovery, the cyclical companies are likely to come back. Companies like in the industrial space or materials or energy travel as well, and hospitality. So investors are starting to look beyond what is going on right now and looking at twenty twenty one or twenty twenty two when there is a massive immunisations possibly and a recovery.

Sue Talbot: [00:01:27] Right. And the markets always do look ahead six months ahead or so.

Mike Thiessen: [00:01:32] Exactly.

Sue Talbot: [00:01:32] So let’s talk about the sectors that were most beat up by the pandemic. And these are the hotels, the airlines and the cruise ships, what we’ve been calling the COVID losers. They rallied back a bit this week. And I’m just wondering what our view is on these beat up names. Are we looking at them again and considering putting them back in the portfolios at this point?

Mike Thiessen: [00:01:55] No, we don’t have them in their portfolios. And right now we’re not considering them. They have bounced back a lot, but a lot of these companies are still under a lot of risk. Some of these companies need some sort of funding or bailout in order to just stay alive or they need mass immunization really soon and really hospitality and travel is a very small portion of the overall market. It’s not a big sector, but we will keep our eyes on it.

Sue Talbot: [00:02:21] So it sounds like we’re not there yet?

Mike Thiessen: [00:02:23] No, not yet.

Sue Talbot: [00:02:25] Ok, so we did make some changes this week in our portfolio. So maybe you can give us some specific examples of some of the names or sectors that we may have bought us during this last week.

Mike Thiessen: [00:02:36] Yeah, yeah, so this week we we trimmed and sold some of our some of our extreme covid winners, so companies that have done very well in our portfolio, companies like Zoom, companies like Netflix or Shopify. So we’ve trimmed those. And then we’ve also started investing in cyclical sectors like industrials, materials, some financials, because we think that those cyclical areas will do well in more of a recovery type phase. And like we said before, the market is looking forward. So it’s looking at what’s going to happen in the recovery. And as we get closer to immunizations, I think that these these areas of the market will continue to do well.

Sue Talbot: [00:03:18] Ok, so let’s just pivot a little bit and talk about the current covid situation, so cases are surging in the US and Europe and even at home here in Canada. And governments are some are restricting some businesses and some some countries are even in lockdown at this at this point. So I’m just wondering, you know, how concerning is all of this for the economy in the markets?

Mike Thiessen: [00:03:46] So I think it is concerning in the short run, I think that that it will create possibly more unemployment in the short run, but in the long run, markets are really seeing past the pandemic, whereas or what the economy is doing right now is focused on now. So for the markets, they’re looking at what’s going to happen when an immunization when massive organizations are occurring, what what parts of the market are going to do? Well at that point. But right now, with with potential more lockdowns here or restrictions here and lockdowns in Europe, it’s not looking good in the short run.

Sue Talbot: [00:04:25] The markets seem to be shrugging off this news because their markets are up today again. And it looks like, well, we’ll end up positive for the week.

Mike Thiessen: [00:04:32] Yeah, exactly.

Sue Talbot: [00:04:33] Well, another concern is the stalled US stimulus bill. The Trump administration came out yesterday and said that they were backing off on negotiating and the markets did not like that. So how do you see this all playing out? You know, how will this ultimately affect the markets?

Mike Thiessen: [00:04:53] So I think that we’re looking we’re likely to have more of a skinny stimulus bill. I don’t think we’re going to get the broad based stimulus bill that the Democrats have been wanting for a long time, 2.5 trillion. We’re probably not going to get the five hundred billion that that the Republicans have been really advocating for. That’s more targeted. But I think the Republicans do have to really, can really push further right now, given that there is a possibility of massive immunizations next year or the following year. They’re they’re going to basically say that we don’t need a lot of stimulus since we’re going to have immunization shortly. But I think it’s unlikely for something to happen this year. We could possibly have something early next year, especially if some of the Senate seats end up going to the Democrats in January. If they don’t, then Biden still going to continue to push it when he’s officially the president early next year.

Sue Talbot: [00:05:49] Yeah, seems like there’s some game playing happening with, you know, the wait and see to see ultimately controls the Senate and, you know, OK, so I’m going to change topics now. You are the director of Sustainable Investments at Genus, so I feel like I should ask you a sustainability question. Yesterday Shell Canada announce that they’re going to give their customers the option of buying carbon offsets at the pump for two cents a litre. And you can do that through their easy pay app. And they’re calling this program the Drive Carbon Neutral Program. And Shell states that this this is part of the transition while we continue to shift our energy mix as a company towards renewable power and renewable fuels. So my question is, do you see this as a continuing trend among oil and gas companies to shift towards renewables?

Mike Thiessen: [00:06:46] Yes, I think oil and gas companies are going to continue to to make a shift towards renewables, they’re going to continue to shift towards products that are more environmentally friendly, as environmentally friendly as you can really get with with oil and gas products. But there is this large segment of consumers out there that are really passionate about the environment, want to fight climate change. And so a lot of other industries and sectors have really realized this, and they have products and services for that, that that demographic. But with oil and gas, they’re a bit slow to get there because of the core product that they’re selling. And I think when when it comes to renewable energy, I think that energy companies are going to continue moving in that direction. They made small moves there, even though, you know, in their marketing material, it might seem like they made bigger moves. They made some small moves so far. But I think they’re going to continue to make more moves, especially as demand for renewables continues to increase and the costs of really supplying renewable energy is decreasing at a very rapid rate. It seems to just make business sense to enter into that industry.

Sue Talbot: [00:07:55] Right. And the demand for oil and gas has really shrunk because of the pandemic as well.

Mike Thiessen: [00:08:01] Exactly.

Sue Talbot: [00:08:03] So I think we’ll end it here. Mike, thanks for your thoughts and thanks everybody for watching. And if you have any questions, please contact your portfolio manager. And if you’re not yet a client, I believe there’s a form on our website right below that link to this video that you can you can fill in. So thanks again, everybody. Have a great weekend. And we will see everybody back here next week. Thank you. Thanks, Mike.