Amplify Trading: STOCKS Outlook 2021

OK, hello, it is Tuesday, 22nd of December. This is the second installment of the Amplify Trading kind of look ahead for 2021. Yesterday we had the head of trading, Piers Curran, and he talked us through from a top-level macro perspective his outlook for the forex market, but definitely got right into some of the details about things like the virus, the vaccine, Biden, the Fed, and these types of things. Today we're going to move away from the FX market and we're going to focus on the equity market. So with me, I've got a bit of a mix really from the Amplify team because I really wanted to take, um, perhaps a bit of a different angle than what we normally would. So a lot of the macro I think was covered yesterday very eloquently by Piers. So I don't think we need to go go too much into that, but I have got obviously Sam here, who's the head of trader development, and Sam does trade actively things like the S&P over a medium, more long-term perspective. But then we've also got Tim, who's definitely into the Dow, NASDAQ, more short-term intraday. And then we've got Eddie, and Eddie, for those, again, just to familiarize yourself with Eddie, he's the head of AmplifyMe. Which is part of our technology division within the bigger, broader group of Amplify. And he's very much involved in spearheading that with the work with business schools and universities and so on. So Eddie definitely looks at the world in a slightly different way perhaps than the rest of the guys because he's a lot more focused on the more kind of micro-level individual companies, sectors. And that's really where I'd like this conversation to go. Just to add a bit of a different kind of angle to things, which is perhaps probably most prudent to have a bit of a review on how the market played out for 2020. And perhaps let's just— I'll start with the top level with this chart here. So hopefully everyone can see that. It's just an annotated chart. Of the S&P 500. So I'm sure Eddie can give us the kind of more microscopic level of how individual companies and sectors have performed, but from a top level, quite a phenomenal year. I mean, with Tim and Sam, I don't know how you felt back in March with trying to then really with great confidence say, yeah, we're going to finish at 3,700 year out when we were in like, what, the 20th of March, just before we hit the bottom on the 23rd. How did you How did you guys feel at that time? Can you remember?

Well, I remember saying to you, and I can't remember, I haven't got the Dow Jones in front of me, but I remember saying something like, "Dow Jones trades at 21,000, I'll work the rest of the year for free." And then 2 days later it did come down. So I mean, listen, that few-week period was intense. But I do remember having conversations similar to how we are having now, we were all of the belief that it was going to recover, it was going to make a new all-time high, um, and, and it has, and more. Um, but, uh, you know, to have held through that would have been, would have been hard, you know, especially if you're, you know, medium, longer term. And it would have been the right thing probably to come out. But that said, you know, the discounts that were offered in, in March, April were, you know, once in a generation. You know, looking back in hindsight as they were in 2008. So yeah, it was a very intense period. It was, yeah, I mean, not much sleep was had in that few weeks.

Tim, in terms of your kind of your year as a whole, was, you know, obviously sympathetic to the subject matter we're discussing here, but I mean, was that a period of, of great opportunity, or has the opportunity been more the kind of recovery, at least on Wall Street, perhaps not Main Street yet, but with the recovery we've had over the last several months to push to all-time highs again?

Yeah, it's a good question. For me, the first, the first half of the year was really trading the volatility and the downside on oil, putting in record days for me personally, especially on the gap down. That was a record day for me. And from trading Volmageddon in 2018, February, early March, I knew that like when you're in these uber highly, highly volatile scenarios, you don't really want to be super active in trying to catch levels on the S&P because it's just going to wipe all of them, wipe the floor with all your key support and resistance, even if you have good levels, you know, just a 50 or 100 tick spike in like a second is nothing and you're just going to get eaten alive. So I stayed out of the way of a lot of the downside. I was actually buying long equities for some of the stay-at-home names. I mean, I have been long Netflix for around 5 or 6 years now. So I was adding to that position. I was also initiating new positions in Zoom, um, as we were coming down hard. So it was really playing the, you know, the, the tech names for that, you know, that would benefit. And I was definitely identifying, uh, some interesting levels on monthly bar charts across like energy equities and stuff like that. And Then looking for optional plays should we start to recover. So I wasn't like trying to be a hero and nail some monster shorts at all.

Well, look, that sets us up nicely, I think, for Eddie to really give us a bit more insight into that, because we kind of started to open up the door towards some of those pandemic plays and so on. So Eddie, I'll hand it over to you from here.

Yeah, I think it's always just worth revisiting that kind of March period because it was so scary, volatile, and uncertain. And I think if we flash back to that, those few days in the office, and I did that video, uh, of that— it was actually termed Top Sector Trends for Trading Coronavirus, obviously, uh, paying respect to how serious the virus was at that time. But I outlined a few characteristics And I believe the video was on March 16th or March 20th, something around that time. So I didn't quite time the bottom when the Fed stepped in on the 23rd of March and started buying all the credit. But attractive characteristics I kind of laid out: low leverage, strong balance sheets, secular tailwinds, technology, strong and stable cash flows, a high ability to service interest payments, so high interest coverage ratio, so generating earnings to cover those interest expense, high cash flow to debt, and a strong ability to withstand temporary demand, uh, and shortfalls and supply chain disruption. I think that really is just describing tech, isn't it? I think if you look at 2020 and why tech's kind of led the charge, and now it makes up such a high proportion of the S&P, and that really was the key driver. So some of those names that I outlined on that slide Pinterest, Zoom, Adobe, Alibaba, Slack, all pretty good picks. I did have Lyft and Uber in there, which were not, not so good in terms of, you know, the shutdowns and the sensitivity to travel and things like that. But I think definitely you wanted to stay away from those cyclical names in terms of, you know, the airlines, the hotels, anything linked to travel and traditional economic activity, I think they were always going to see some damage. Particularly, you know, I think Tim could probably speak to this, those kind of oil companies as well, just inherently they are extremely leveraged in terms of being tied to the, obviously, the oil-producing nature, but they took on a huge amount of debt. And if you were looking for kind of best-in-class premier balance sheets that wasn't in oil, or for the most part, that was in your Amazons, your Googles that just have so many gears and levers to pull. If it's search engines, if it's YouTube, if it's Zoom, all of those plays were really driven by the balance sheet quality. And if you look at some of the kind of charts in terms of what kind of factors and things led the charge, it was those extremely high-quality balance sheet names high growth momentum. And obviously this was accelerated ridiculously by the Fed stepping in and really giving the green light to credit investors, which is, if you remember, where a lot of the problem was, you know, the credit spreads driving up dramatically, a lot of distress in those markets. If you remember the credit default swaps and the CDX index and things like that. Now we see credit spreads you know, really record lows. So a lot of certainties returned to the market, and investors are feeling confident about that kind of reflation trade. So if I can speak to kind of the outlook in terms of what we've seen, let's say, through November and things like that, I think now the market is really looking for leadership, and I think tech and the FAANG names particularly did provide that leadership in 2020. And as we saw really starting, you know, 3 months ago, which is what, um, Ant's got up, I think energy is up 20% now on a 3-month basis at a sector level. Uh, it's still down 35% year-to-date, so there is some unloved names there. And I think if you are looking at energy, um, there is still, I think, some opportunity, um, for those high-quality names, especially if they are trying to appeal to that ESG kind of thematic trend that I think will continue to dominate as well. But I do think, yeah, heading into Q1, I think we are looking for leadership in terms of the breadth of the rally and those kind of cyclical sectors looking to outperform.

That's interesting that you mentioned the, the, you know, the best-in-class balance sheets in the energy industry. You know, I think in the oil industry, well, energy North America specific, there were a lot of sort of mid-tier companies that it's been a long story of them being really geared in a very delicate way, highly financed on their operations. And so when, you know, the piper came a-calling over COVID, you saw a huge amount as you do in these low oil price environments of mergers and acquisitions. But it's always the top tier integrated companies like Shell, BP, Chevron, ConocoPhillips that are just going to survive and they're going to be the ones doing the acquisitions. And so when we start to really prove a bottom, you know, for me getting into equity plays like BP, Shell, you know, just makes so much sense.

Yeah, I was just going back to this heat map and looking to kind of move the, the conversation into some other areas. And this is looking at the last 1-month performance, and here you can see, you know, there's a couple of names obviously that stand out, whether they're tied to, to drugs and vaccines, perhaps in the case of Eli Lilly, Disney, Netflix with COVID developments, or Apple with the substantial increase in their iPhone kind of demand that they're anticipating. But I just wanted to see if there's any comment on the banking sector. We had the stress tests come out of the Fed not that long ago, a couple of days ago, in fact. They were talking about giving top banks conditional green light to buy back shares again in Q1. What does that actually mean for these stocks? And if you were looking at that as a sector? How do you interpret that for somebody who's maybe not familiar with the kind of the buybacks and, and what that really does mean from the Fed?

Yeah, I think banks and financials more generally are a very interesting kind of topic going into next year because if we flash back to what we saw even heading into the kind of COVID crisis, they were absolute and relative valuation lows and obviously they got beaten up probably rightly so, in March, just because their loans, uh, the, you know, more the more traditional banks like your JPMorgans, I guess Citi, Bank of America, particularly Wells Fargo, um, their loan books, right, were linked to the real economy. And as we saw, we saw outperformance from tech and super underperformance from the real economy. And there was a lot of worry about, you know, defaulting you know, the loans that potentially could default, you know, tied to the real estate sector, hospitality, restaurants, you know, all of those names. So they put aside a huge amount of loan provisions in the billions for like JP Morgan, for example. And now basically a lot of them were saying the whole time, but particularly now, that they were kind of overcapitalized. And I think it's a big nod from the Fed in terms of the overall risk sentiment that now they're saying, look, you're able to now use that capital, distribute to shareholders. Um, the banks again is an interesting one. Do they then deploy that capital this year? Is it through buybacks, which lowers the shares outstanding, increases their earnings per share? Obviously, uh, positive for the banks. Um, there's some good, you know, a valuation perspective, still some, some opportunities there. But we do need to also remember on the flip side that the Fed came out obviously on Wednesday, super low rates until at least 2023, which is bad for their net interest margins, for example. But again, those, those banks that are tied to the investment banking activities, like you'll probably see from Q4 earnings when they come out next next quarter. You know, IPO, so equity capital markets growth, M&A has returned as markets have become more sanguine. You know, they generate a huge amount of fees from those areas. So those banks, again, can tie to that investment banking division trading, of course, that they did so well. They would be my pick over those kind of deeper value names, but I do expect those to kind of get some love as well, as we see. But again, all of this is all tied to the vaccine. You know, you can say whatever you want. If we do see— I think now it's all about mutations. If we do see mutations, if we do see the vaccines unable to satisfy, you know, and cure the new mutations, then whatever we talk about is pretty, pretty irrelevant, and we'll see a flip from that reflation trade back to the work-from-home COVID-compliant stocks.

So how— this goes out to everyone— how do you go about then positioning here? There's, as what Piers was describing yesterday, there's a base case, which is that the vaccines are effective, they are deployed, the cumulative value of all of the other pharmaceutical companies coming then to the point of distribution is going to happen.

As the months roll on.

So do you position yourself— if we were talking stocks only— do you position yourself in a way to prepare for that potential tail risk, or do you just remain agile enough to switch things up should then the situation change?

Yeah, I think, I think, I think you've definitely got to stay tactical, uh, in your, in your approach, because as soon as we get positive vaccine announcements, you see a green light for those reflation trades that we talked about in terms of the cyclical industrials, materials, small, small to mid caps, commodity stocks. They'll perform extremely well, um, in that kind of reflation trade. And then again, with the stimulus, you, you're kind of looking at higher yields there, um, which would obviously benefit those names. Um, I do expect value that kind of factor to, I would say, outperform or try and find leadership in that kind of Q1. But as soon as we see that kind of mutation, um, that would be to the detriment of that, and you would see a rotation back to, I guess, those COVID-compliant. In terms of how to position yourself, I know Tim, Tim's going to like this comment, uh, as he has in the past. The dividend names, um, you know, if you're talking multi-asset class the yields are, let's say, on 10-year look extremely unattractive and the bonds look very overvalued. So if you're looking for almost an option on the reflation trade plus dividend income, then those high dividend names are going to look really attractive because they kind of provide you income, you know, if there is some, let's say, drawbacks on that, on the re— on the mutation of the virus. But also then give you almost a call option on the reflation trade itself. And that's, you know, what you hear from kind of credit investors as well. You know, high yield, again, you're not going to get the price appreciation, for example, that you probably did this year because of the Fed stepping in, things like that. But you will get that income. So overall, my base case is I'm positive on equities. I think it's hard not to be with the potential base case of, let's say, vaccine rollouts, you'd think by Q3. I think that's my base case because I do think there will be blips, uh, just like Piers, uh, meant, you know, kind of alluded to, uh, before. Um, but overall, with the Fed as well, they're, you know, supporting markets. You've got the stimulus packages. Okay, it was slightly disappointing yesterday, but the support is there. Even with the credit facilities, they didn't even really get scratched this year. You know, so the Fed is there to support it. Will we see the gains we saw this year, let's say from the March lows? Probably not. I think they will be more muted, but overall I would be positive on equities going into the next year.

Okay, so that leads us up for Sam then. I know Sam's not shy of putting his name on a couple of S&P year-end calls. So do you want to bring up the S&P, Sam?

And yeah, I'm a lot more positive than you there, but listen, you know, this time last year I would absolutely would have, well, probably said it would have ended where it is, but not the journey that, that got us there. Um, and a lot of people I guess would have had pie in their face in, in quarter 1 and 2, um, thanks to corona. But yeah, I, for me, I just put it in our chat where, where do I, where do people see end of year 2021. I mean, I, I think early on we're going to take out the 4,000 handle on the S&P. I think there's going to be pullbacks, like Eddie said, blips along the way due to, to vaccine developments or lack of. I think that's going to happen, and that gives opportunity for people to get in. There's a lot of money still on the side here, um, and also Corona only sent stocks down 35%. Yeah, I think we, we push on big time next year. Uh, so end of year, it's hard to, to say where we finish the year, but I think we, we get to about 4,200. Um, and then it's kind of how we go from there. But yeah, I, I'd say, and I don't really feel that's me putting my, my neck on the line. I feel that that comes relatively quickly. It's just whether we can sustain a push, uh, above there or not. At some point as well in, in our lifetime, I think, I think Dow Jones is, is going to get to, uh, get to the big, big 100,000 as well. Um, not anytime soon, but in our lifetime, 100,000 is coming.

That is The call of the century, right?

Literally the call of the century to come. Yeah, uh, but yeah, I think $100,000 comes. I think, I think the coronavirus lows in, in all US stocks will never be seen again, like the 2008 lows from the GFC. I think we'll never see— what was that, $2,162? I don't think we'll ever see again.

For me to practically, um, actually where for me to put money to work over these, the electric car themes at the moment. So I'm looking at iDrive, I'm looking at Hail. These are ETFs, EV ETFs, and it's sort of a set and forget trade. I mean, whereby you're, you're really backing the overall theme and you don't need to be essentially taking outright risk across, say, Tesla, where you might have a liquidation event down 20% on the day and you're thinking well, you know, holy hell, what's happening here? You know, kind of smoothing out that trade with a basket of EV stocks is just a nicer trade for me. And there are a few, there's about 3 or 4 key ETFs out there for EV.

Yeah.

Yeah.

I think 2 sectors, I guess, or areas that are particularly going to be interesting and interesting over the next kind of 3 to 5 years is genomics and kind of that gene editing kind of play to cure your sickle cell diseases and your potentially cancers. The computing power available now in terms of that kind of gene editing, they've got power that they haven't seen before. And you see names, particularly in the ARK ETF, which is Cathie Wood's ETF, names like Editas, CRISPR, that have done extremely well over the last month or so, up 100-200%. So that, that's quite a big theme that you'll start to hear a lot more about. And I do think as well, as we have seen that move online, is kind of security and online security and an increased spending of businesses on that security, because like we saw with Washington being hacked the other day, I don't think there's enough focus on that market yet. So there are two things that I'm looking at, particularly the gene editing one. And I definitely by any means do not fancy myself as a biologist, but you can, you know, you can look at it just like the vaccines at a pretty high level and see the potential there. So that's two kind of areas I'm looking at the moment.