Overweight techs remain a strategic pillar while easing lockdowns bring other long/short opportunities

Tech sector remains the notable out-performer 
The correction in early days of May ended in the blink of an eye as the liquidity-driven US stock market melt-up resumed its course, gathering more steam and breadth, shrugging off concerns about surging unemployment, plunging economic activity, weak corporate earnings and rising Covid-19 infection rates raging across the world. Some bears have gone into hiding while others are now up in arms, having missed one of the biggest rallies ever seen in less than two months, some have declared the markets broken and decoupled from fundamentals while others have labeled the financial markets as rigged by a US central bank that has lost its moral compass. 

As we have previously underlined, the speed of the rally has left underinvested fund managers too nervous to remain on the sidelines, forcing them to put money to work and buy issues where there is at least some visibility. We believe this has led to a notable success in our long strategy of recommending buying stocks within the technology sector. As we have noted this has been mainly a defensive stance as we have viewed the sector as one of the only segments of the market which are benefiting from increasing migration of businesses to the cloud, growing demand for remote access to work stations due to work-from-home regimes and in-home entertainment offerings which have led to huge pickup in data traffic. Thus, it is perhaps not hugely surprising to see that the big rally in US stocks have led the tech heavy Nasdaq to strongly outperform other indices this year, leaving it only 7% below its all-time highs registered last February.

Lockdowns easing usher huge challenges but forcing change in our short strategy
For better or worse, more and more governments are coming to the conclusion that the virus is now firmly entrenched in our echo system and in its current form, it has a low enough fatality rates to risk easing of the lock-down regimes across the Western world to avoid further economic hardship. How each country will be able to cope with the likely spike in infection rates and rising death tolls will obviously depend very much on hospital capacities, resources to provide adequate personal protection equipment for medical personnel, better knowledge and access to more effective treatments, availability of medical equipments needed in ICUs and testing and contact tracing capabilities to allow for easing measures as safely as possible.  

However, anything short of a vaccine or herd immunisation leave many brick and mortar-based businesses with huge challenges ahead in the coming months. Operators in the service sector have to allow for safer distancing between customers that leave them likely to operate at sub-optimal capacities while the manufacturing firms will have to further automate their production lines as much as possible while adjusting output for weaker demand that is surely likely to persist for some time to come. Come what may, we think most country borders are likely to remain shut, even months after a vaccine is discovered to avoid the risk of importing more infections, especially those of a different strain that could prove more deadly. 

All these factors keep us generally cautious of adopting a more bullish stance towards the bombed out sectors that have also staged a decent rally as easing of the lockdowns are leading to what we believe are misplaced hopes for a more notable recovery from 2nd half of this year. This has made life much tougher for our short selling strategy which is one of our key mandates, forcing us to look for candidates in more traditional defensive segments of the market to be able to generate alpha as shorting bombed out cyclicals have become increasingly challenging given these growing recovery hopes and wider breadth in the market rally. 

The ‘Great Outdoors’ likely to become a notable stock market theme
Although not a big sector and fairly narrow in its scope in terms of number of related companies to look at, we think outdoor sports equipment companies such as bike and bike component makers are likely to be prime beneficiary of the current easing of lock-downs. In the case of bikes, this is partly because people are likely to shun gyms as well as public transport while prospects of enjoying activity in open air, especially as weather improves in the northern hemisphere, could be very alluring. We are already seeing good evidence suggesting that bike sales are starting to surge in Europe. 

Moreover, although in many countries jogging outdoors have been allowed during the lockdown phase, we think easing of restrictions could lead to a general boom in funner sports activities that could lead to a surge in related sports shoes and equipment–perhaps not so much for team sports and more so for non-contact sports like tennis, not to mention, outdoor camping gear. In the past 4 weeks we have identified a few buy candidates in Japan which we have started recommending investors to accumulate. We also argue this trend could leave game consoles gathering dust and one reason we are generally negative about the medium-term prospects of video game companies which have seen a big positive distortion from the pandemic and which could face a backlash as lockdowns regimes ease. This is one area we think is fertile grounds for looking for short sell candidates.