Market Musings BONUS 24/01/21: Long-term Trends for 2021
Long-term Trends for 2021
Summary:
- Focus on either Momentum trends which are well-established, and which have strong structural drivers; or
- Contrarian reversals of long-existing bearish trends, which have now turned bullish and which have plenty of upside potential.
- A word of warning: Momentum trends are always at risk of suffering should equity markets correct, so require relatively high risk tolerance.
- Momentum trends include subsectors of Tech, Biotech/Medical Diagnostics, Clean Energy
- Contrarian reversal of bear trends include: Commodities, notably Base Metals, Precious Metals, Agricultural
- UK Stocks are also a contrarian call on a global context:I prefer Small-Cap and AIM exposure for exposure to the expected UK domestic recovery
What long-term trends can investors focus on this year?
Here we're going to look at some long term trends that could work well in terms of investment themes for 2021. There are two selections I've tried to make here:
- Firstly, those trends that have really worked well in 2020 that I believe could work well. Again, in 2021, in a continuing momentum fashion.
- Secondly, I'm looking at significant changes of trends, from downtrends in the long term to long term bear markets that are now turning into bull markets. As of the last few months. The idea here is to be more contrarian in terms of theme selection.
Momentum Trends: Tech, Biotech/Diagnostics, Clean Energy
So to continue looking firstly at momentum trends, clearly, momentum has been strong in a number of sectors, namely technology, biotech/health care diagnostics, and clean energy. So these are the three sectors that I concentrated on, for momentum, ideas for 2021.
Favoured technology subsectors
If we first take technology, I am less convinced that mega cap tech in the US will continue to perform as well as it has in 2020.Having said that, there are certain areas of technology and related to technology that I think will continue to perform well.
These include:
- artificial intelligence,
- video games,
- cyber security, and
- semiconductors.
These are the secular themes that I believe will continue to work well, and which continue to have strong momentum even into January of this year.
Tech subsectors I like for 2021
Source: tradingview.com
The ETFs one can look at for these themes include:
- AI (yellow line): £AIAG https://fundcentres.lgim.com/uk/professional/fund-centre/ETF/Artificial-Intelligence
- Video games (orange): £ESGB https://www.vaneck.com/uk/en/etf/equity/espo/overview?country=uk&audience=retail
- Cyber security (dark blue): £ISPY https://fundcentres.lgim.com/uk/professional/fund-centre/ETF/Cyber-Security
- Semiconductors (cyan): US-listed ETF only SMH https://www.vaneck.com/etf/equity/smh/overview/?country=us&audience=retail
For those looking for the more UK-oriented technology fund that invests in a number of these technology subsectors, look at Herald Investment Trust (LON:HRI) https://heralduk.com/funds/herald-investment-trust/ .
Health care: Biotech, Diagnostics
Secondly, looking at health care, I think there are some very key areas here that can continue to perform well, namely:
- medical device devices and diagnostics,
- biotech, and
- Health care breakthrough technologies.
There are several key underlying drivers for these segments of the Health care sector. Firstly, the current coronavirus pandemic has focused the minds of people and governments on health care. Assuming that the current vaccination programs and restrictions on movement are successful in bringing down the COVID-19 infection rate in the near-term, there will then be a focus on catching up with all the medical treatments that have been delayed in order to deal with the pandemic.
Secondly, demographics still argue for a focus on lifestyle and degenerative diseases which cost health systems and insurers huge amounts of money, such as obesity and type 2 diabetes, cancer and Alzheimers/dementia. Not to mention mental illness such as anxiety and depression, the incidence of which have exploded during lockdowns.
Thirdly, new techniques in Artificial Intelligence and Machine Learning are improving the productivity and efficacy of drug discovery and health care diagnostics, enabling illness to be detected and thus treated earlier and more efficiently.
Health care subsectors I like for 2021
Source: tradingview.com
The ETF/investment trusts one can look at for these themes include:
- Biotech (orange): Biotech Growth Trust (LON:BIOG) https://www.biotechgt.com/
- Health care Breakthrough (cyan): £DOCG https://fundcentres.lgim.com/uk/professional/fund-centre/ETF/Healthcare-Breakthrough
- Health care Innovation (dark blue): £DRDR https://www.ishares.com/uk/individual/en/products/284216/ishares-healthcare-innovation-ucits-etf-usd-acc-fund
Clean energy
add on to clean energy in clean energy. Renewable Energy is clearly the very strong play here, which I believe will continue to work well in 2021.This relates not only to solar and wind power, but also hydrogen and biomass energy and, and also looking at battery technologies, which are linked of course, to electric vehicles.
I must caution here: while the investment story is clear and it is a theme that investors have clearly latched onto given the huge global problem of combatting climate change, there is also an element of speculative excitement built into shares such as Tesla, and in hydrogen energy shares.
Clean Energy ETFs I like for 2021
Source: tradingview.com
The ETF/investment trusts one can look at for these themes include:
- iShares Global Clean Energy ETF (orange): £INRG https://www.blackrock.com/americas-offshore/en/products/251911/ishares-global-clean-energy-ucits-etf
- LGIM Battery Value Chain ETF (cyan): £BATG https://fundcentres.lgim.com/uk/professional/fund-centre/ETF/Battery-Value-Chain
- LGIM Clean Energy ETF (dark blue): £RENG https://fundcentres.lgim.com/uk/professional/fund-centre/ETF/Clean-Energy
Contrarian Trends: Commodities - Precious and Base Metals, Softs, Uranium
Now, that is the short selection for momentum now to turn to the more contrarian ideas. Clearly, I believe the biggest area for contrarian ideas is in the commodity space right now.
Silver and Platinum group metals
I've talked a lot in the past about precious metals. And yes, this is still one area I believe, has lots of potential for 2021.
I'm focused within precious metals at the moment more on silver and platinum - platinum because it has been a serial underperformer since 2008 and has underperformed even gold by a long way over the last nine years. But of late it has been breaking out to the upside, and I think it can still exhibit more catch-up performance over the rest of this year.
This is equally true for silver; at $26 an ounce currently, it's still a long way from its 2011 high of $50 an ounce. Now bear in mind that gold has actually met and even gone past its 2011 peak level. And this is certainly not at all the case yet for platinum (in orange) and silver (in blue). Hence why I particularly like platinum and silver, given the growing strength of industrial and investment demand for these two metals.
Silver and platinum remain far from peak 2008, 2011 levels
Source: tradingview.com
But if you are looking for the strongest momentum within the precious metal space, you should look to rhodium. Rhodium has been on a tear in 2020. This is one of the Platinum group metals along with palladium but has been the strongest performer of the three of palladium (in orange), platinum and rhodium (in blue) over this period.
Rhodium and Platinum have been on a tear
Source: tradingview.com
Again, rhodium like others is used in catalytic converters, with demand that continues to be very strong, if you look at the Johnson Matthey rhodium price.
Base metals: Copper, Nickel, Tin
Other commodities that I think show very strong contrarian momentum, which have underperformed over the long term but are now starting to perform well in the shorter term include base metals. By this I mean copper, nickel, and also my favourite at the moment tin which is very little talked about, but actually is the base metal that probably benefits the most from structural demand from renewable energy and batteries in electric vehicles.
Copper, Nickel and Tin all look interesting
Source: tradingview.com
The ETF/investment trusts one can look at for these themes include:
- Wisdomtree Industrial Metals: £AIGI https://www.wisdomtree.eu/en-gb/products/ucits-etfs-unleveraged-etps/commodities/wisdomtree-industrial-metals
- Wisdomtree Copper (cyan): £COPA https://www.wisdomtree.eu/en-gb/products/ucits-etfs-unleveraged-etps/commodities/wisdomtree-copper
- Wisdomtree Tin (dark blue): £TINM https://www.wisdomtree.eu/en-gb/products/ucits-etfs-unleveraged-etps/commodities/wisdomtree-tin
- Wisdomtree Nickel (orange): £NICK https://www.wisdomtree.eu/en-gb/products/ucits-etfs-unleveraged-etps/commodities/wisdomtree-nickel
Agricultural commodities: Sugar, corn etc.
Then on to agricultural commodities by here we're talking about the likes of corn, sugar, and so on. Now, here again, momentum has been very poor over the last decade, but has started to become very strong in the last few months. So I like the idea of buying into agricultural commodities as a whole.
Agricultural commodities break out
Source: tradingview.com
Wisdomtree Agriculture: £AGAP https://www.wisdomtree.eu/en-gb/products/ucits-etfs-unleveraged-etps/commodities/wisdomtree-agriculture
Uranium
One other area of commodities that is a good contrarian buy right now, I believe, is uranium. And this certainly is a source of energy that has been very much out of favour, particularly since the Fukushima disaster in Japan a few years ago. And of course, since the announcement a few years ago that Germany was going to phase out its nuclear power.
And this, of course, has led to a long bear market in uranium, combined with the fact that the uranium market had been flooded by recycled uranium coming from the dismantling and decommissioning of nuclear warheads in the US and in Russia. But that has now run its course, we see uranium prices rising and uranium stocks also starting to awaken.
In the UK, the focus in Uranium is either on Yellow Cake (LON:YCA) or on Geiger Counter (LON:GCL) . In the US, one can buy ETFs of uranium-producing stocks, namely URA (in blue) and URNM (in orange).
Uranium awakens after a prolonged slump
Source: tradingview.com
What else can I consider for this contrarian call?
Contrarian Trends: The UK Stock Market (finally)
The last contrarian call, I would make would be in UK equities. Now of course, since the 2016 Brexit referendum result was announced, UK assets have generally underperformed assets in the rest of the world. This has been very true as well not only of course for Sterling, but also for the UK stock market compared to the rest of the world.
Now, finally, we have positive catalysts in the form of a Brexit trade deal with the European Union and also a rapid rise in vaccinations. Over 8% of the UK population now has received their first dose already, which is one of the most advanced vaccine COVID vaccine programmes in the world. We can thus look forward to a recovery in the UK economy over the course of 2021.
The segment of the UK stock market that should benefit the most from domestic recovery is mid- and small-caps. You can of course choose the £XMCX FTSE 250 mid-cap index (cyan line), but I would look more to The £CUKS MSCI UK small cap index (yellow).
For more focused small-cap exposure in the UK, I continue to prefer the Blackrock Throgmorton Trust (LON:THRG) investment trust (orange), which has outperformed its peers and the small-cap index by a suitance over the past few years.
But the index that has performed best over 2020 in the UK is actually the AIM index; for this exposure, I like the Amati Aim Vct (LON:AMAT) Amati AIM VCT (dark blue), which is a useful vehicle for VCT investors for the tax credit.
UK Small-Cap and AIM stocks have been strong
Source: tradingview.com
- FTSE 250: £XMCX https://www.justetf.com/uk/etf-profile.html?isin=LU0292097317#overview
- MSCI UK Small-Caps: £CUKS https://www.ishares.com/uk/individual/en/products/253474/ishares-msci-uk-small-cap-ucits-etf
- Small-caps: Blackrock Throgmorton Trust (LON:THRG) https://www.blackrock.com/uk/individual/products/investment-trusts/our-range/blackrock-throgmorton-investment-trust/trust-information?switchLocale=y&siteEntryPassthrough=true
- AIM: Amati Aim Vct (LON:AMAT) http://amatiglobal.com/amat.php
Have a great week ahead,
Edmund
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8 comments
Thanks Edmund. Top notch as always. I would've thought a company like Sylvania Platinum (LON:SLP) would be quite appealing too, despite the recent bull run of 2020. I know you were a big fan previously - has anything changed since their update on Friday or do you continue to hold/believe the investment case?
Thanks
RTW
Another excellent article, Edmund.
An investment trust you didn't mention in this article which is showing good recent share price momentum and invests in "a worldwide portfolio of mining and metal securities" is Blackrock World Mining. It is currently on a discount of about 2% to its Net Asset Value, although that has been considerably bigger in recent years:
https://www.theaic.co.uk/companydata/0P00008ZOQ/performance
Good morning Edmund
A great article as usual. Regarding exposure to UK small and mid caps, most of my portfolio is comprised of such stocks, however I have been looking at ways to increase such exposure in the portfolios I run for my wife and daughter. I considered the Throgmorton Trust and while its performance has been very good, including the use of CFD's to short or add to long positions, its fees are extremely high compared to other trusts/funds. According to figures from Hargreaves Lansdown £5000 invested in Throgmorton over 5 years gives rise to fees of £749 versus £543 for JP Morgan Smaller UK Companies and £400 for Premier Miton UK Smaller Companies. the latter is a fund as opposed to an investment trust. These figures include Hargreaves own charges.
Admittedly the performances of the latter have not matched Throgmorton over 5 years, however they are still very respectable. Both Premier Miton and JP Morgan have outperformed Throgmorton over the last year, the former significantly so. Added to which Throgmorton trades at a small premium to NAV versus a discount of 3% or so for JP Morgan. So in the end I opted for JP Morgan and Premier.
We shall see how this decision pans out, but ultimately it was the fees, including performance fee that steered me away from Throgmorton. My view is that fund managers are well remunerated and shouldn't need to be incentivised by a performance fee.
Best wishes
Jonno wrote:
"My view is that fund managers are well remunerated and shouldn't need to be incentivised by a performance fee."
I strongly agree! Performance fees encourage fund managers to increase the riskiness of their portfolios, because they mean "heads the fund manager wins, tails he doesn't lose".
Some interesting macros themes here. Thanks for listing out the ETFs for review, appreciate that.
I previously was a uranium bull but have since reverted. The bull case for URA is China building 200 new reactors, which they may well do. However, the pace of price reduction in solar is impressive. I'm not sure the economics of nuclear expensive reactors will stack up over 30 years, given the pace of change in solar.
For example, where I live I have solar panels on the roof. During the day, they generate more power than I can possibly use. In the evening, of course nil. However, there is a plug-on battery option for the inverter. Right now the cost-benefit equation is not there yet, but in a few years it will be. At that point, in a sunny locale, my home will generate enough solar power for all needs 24 hours, charge an EV and some surplus to return to the grid.
So there is an interesting inflexion point coming up, for countries with high sunshine levels at least.
Most solar systems only produce around 3-4kw per day in the U.K. which is maybe just enough power if you gas.
Absolutely agree re solar+battery but you also need to add wind. When you consider both domestic installations (leading to much reduced domestic pull from grid even with EVs) and commercial installations (using onsite and grid scale power), over the next 10 years the case for hugely expensive, capital upfront nuclear plants is going to evaporate and with it demand for uranium. These power generation models are falling on a rapid and likely long term downward price curve.
There may be a brief period when Uranium supply is short as existing/under construction plants meet a complete lack of investment in new mines. But starting construction of a $20Bn nuclear plant in 10 years is going be stupid economically and politically difficult even in China/India etc.
Renewables/electrification is the 30 yr winner
Many thanks, Edmund, for the extra post. For those of us who are top-down investors, with a predilection for the US and World markets, your observations are invaluable. These are exciting times with US inflation likely to rise whilst interest rates stay close to zero. There is nowhere else for investors to go apart from equities, commodities and cryptocurrencies. Having already invested in cyber security (through HACK) and semi-conductors (through SMH), I'm now looking at Agriculture via DBA. My inclination is to chase commodities via Anglo American (LON:AAL), Rio Tinto (LON:RIO), COPX and BRWM. Many thanks again.