Shane Obata, portfolio manager at Middlefield Capital
FOCUS: Global stocks

MARKET OUTLOOK

While we may see higher market volatility heading into the election, there are multiple reasons to remain invested in equities. Monetary policy is extremely accommodative and will remain so until the middle of the current decade.

Fiscal policy has also been very supportive and we expect more stimulus to come. While negotiations between the White House and Congress have stalled, we expect that both sides will eventually reach a compromise on a new stimulus bill for up to $5 trillion. In addition, we are positive on the progress being achieved on various healthcare initiatives. We have seen a significant ramp-up in testing with multiple countries such as Canada, the U.S. and the WHO signing deals to purchase and deploy hundreds of millions of rapid tests. Furthermore, multiple companies are undergoing late-stage vaccine trials and will likely present Phase III data in Q4 2020.

Joe Biden is far ahead going into the final stretch. While a Democratic sweep could have a negative impact on equity market sentiment as it increases the likelihood of higher taxes and regulation, we do not believe this outcome should cause a major move out of equities, especially given the Democratic party’s plan to significantly increase fiscal spending in the coming years.

In terms of allocation, we are finding highly attractive opportunities within the Real Estate sector. Industrial REITs are well positioned to continue benefitting from rising e-commerce adoption. In addition, we have identified multiple high quality, “long-term value” REITs that are trading at extreme discounts to their Net Asset Values. While we acknowledge that there are near-term challenges facing the Real Estate sector, we believe the current valuation discount will narrow in the months ahead as the economy gradually recovers.

TOP PICKS

Alphabet (GOOGL NASD) Most recent purchase at US$1,506.28 on July 15.

Still my favorite company in the world. It had a good third quarter, with most geographies and verticals recovering. Google owns nine platforms with over one billion users. It’s already massive, but it’s still expected to grow sales by 20 per cent through 2022. There’s potential for Google to capture more share in advertising. New opportunities include Maps monetization, e-commerce and other bets which may surprise us (Waymo, for example). Regulatory risk is a concern, but it is difficult to envision sweeping changes given how much utility is provided. We are comfortable paying these prices for Alphabet’s ecosystem and remarkable growth given its scale.

Advanced Micro Devices (AMD NASD) Most recent purchase US$78.99 on October 27.

AMD is a leading semiconductor company that operates in three large and growing markets: Data centres, PCs and gaming. AMD has industry-leading innovation and performance across multiple segments. The Xilinx deal adds $13 billion in total available market to data centres and $21 billion to embedded. It will likely extend its lead as it releases new products at an aggressive cadence. AMD’s main opportunity is to continue taking CPU market share from Intel, especially on the server side. There's upside in units but also room to capture more revenue share as average selling prices catch up to Intel’s. Significant upside from semi-custom, with AMD supplying CPUs and GPUs for both the PS5 and Xbox Series X. It’s trading at a big premium to its peers; that said, we are comfortable paying a premium for high quality and growth potential.

Prologis (PLD NYSE) Most recent purchase at US$85.99 on April 15.

Rising e-commerce adoption creates the need for more industrial real estate (warehouses). Prologis provides ultra-high-quality exposure to this industry. This is the second-largest REIT in the world, with nearly one billion square feet in its portfolio; 600 million are in the U.S., making it nearly four times bigger than its next competitor. $2.2 trillion in goods flow through Prologis distribution centres each year (2.5 per cent of global GDP). It’s got a clean balance sheet, consistent dividend growth and the lowest cost of debt in the REIT industry. Prologis is trading at a big premium to its peers; that said, we are comfortable paying a premium for high quality and peer-leading growth potential.

PAST PICKS: AUG. 7, 2020

Alphabet (GOOGL NASD)  

• Then: $1,498.37
• Now: $1,630.60
• Return: 9%
• Total Return: 9%

Costco (COST NASD)  

• Then: $340.91
• Now: $359
• Return: 5%
• Total Return: 6%

ASML Holding (ASML NASD)  

• Then: $366.07
• Now: $362.82
• Return: -1%
• Total Return: -1%

Total Return Average: 5%