New Tail Risks Emerge For 2021

Big Reversal

In a previous article, we mentioned that in the past few weeks, the stay-at-home stocks have been beating the reopening stocks. Either this is a temporary correction or the vaccination rollout will go poorly. The chart below, which shows month over month positioning, shows similar results. As you can see, tech had the biggest increase in positioning and emerging markets fell the most. Energy is in familiar territory with positioning declining.

If you thought the vaccination process in emerging markets would go smoothly, you were incorrect. However, that doesn’t mean heard immunity won’t be reached at some point by next year. Energy is a play on emerging markets because that’s where demand growth will come from in the next 10 years since developed countries are investing in green energy.

Energy stocks are a short-duration trade. Their near term profits are much more important to their valuations than tech which relies on long term growth. That being said, large swoons in their stocks based on near term earnings declines are often overdone. For example, the decline in March 2020 was far too dramatic. If vaccine issues in emerging markets delay their economic recoveries by 6 months, buying the dip in their stocks and energy stocks makes sense.  

The Worst Of The Worst

The chart below shows the worst-performing sectors in 2020 in emerging markets. To be clear, emerging markets had a strong rally from early November to early February based on vaccine hopes. However, this chart looks a lot like performance in the past 1-2 months which makes it relevant. As you can see from the chart below, the worst investment was in oil and gas. The Brazilian ADR of Petrobras is down 29.5% since its peak in January. It’s tough to deal with currency headwinds and end-market headwinds.

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Disclaimer: The content in this article is for general informational and entertainment purposes only and should not be construed as financial advice. You agree that any decision you make will be ...

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