It has been an interesting month in markets. The S&P 500 Index reached 12 month highs with markets brushing off March’s COVID-19 panic. There have been many discussions about how narrow the rally has been in that a handful of stocks have driven the sharp rebound. In fact, just over 35% of stocks in the index have had a positive gain over the year. Leading stocks in the technology sector have been the winners, with Alphabet Inc (Google), Inc and Apple Inc rebounding strongly from March. Essentially, growth and quality stocks have been rewarded and the impact of COVID-19 on such companies has been minimal relative to other sectors. In some instances, the pandemic has accelerated growth for online retail businesses such as Amazon. On the other hand, there have been notable losers. Airlines, retail property and infrastructure assets such a toll roads and airports have been losers on the back of COVID-19. This divergence has been reflected in the recent Australian reporting season with companies such as JB Hi-Fi reporting record annual profits, while Qantas continues to cut more jobs as it prepares for a $10 billion revenue hit.

A key challenge for investors at the moment is whether to continue to back the ‘winners’ and pay more for growth, or to look for value amidst some of the ‘losers’ and try to identify a bargain. From a portfolio perspective we have taken the view that the current market conditions are favourable to quality/growth companies particularly given the low interest rate environment. However we also continue to have some exposure to the value part of the market, as we believe that some of the bad news has lowered the price of some of these sectors and that over the medium to long term there is an opportunity for these stocks to rebound.

While the current market dynamics are different to what we experienced during the tech bubble what is very similar is some of the narrative. I recall prior the collapse of the tech sector we were in a ‘new paradigm’ where value investing was dead and growth companies prospered. History generally doesn’t repeat but it can rhyme. Ensuring that your portfolios are not anchored to one part of the market and they remain diversified, particularly in an environment where uncertainly persists, remains important.

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