In the HBO documentary ″Becoming Warren Buffett,” the billionaire compares investing to playing baseball.
“The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot. And if people are yelling, ‘Swing, you bum!,’ ignore them.”
In the same vein as when a good hitter knows when to swing, Buffett only invests in companies that fall within his “circle of competence”, a concept he first described in his 1996 annual shareholder letter.
1. Quality companies – Stocks that will weather stormy markets
In an uncertain environment, Harper reckons one of the best actions investors can take is to deck out their portfolio with quality stocks. In the BetaShares vernacular, quality can be quantified into the following:
- High return on equity and profitability
- Low leverage
- Earnings stability
Companies with these traits can generally be found in the technology and healthcare sectors and include cashed-up giants such as NVIDIA, Facebook, Google and Johnson & Johnson, which were benefiting from structural tailwinds even before COVID-19.
Interestingly, Harper says quality as a factor has outperformed the S&P 500 Index by 4.56% per year over the last 10 years and exhibited less volatility at the same time. Even in the March market pullback, quality stocks outperformed the broad market by 5% and are already in the black again this year.
“Quality stocks exhibit lower drawdowns through negative market environments and have demonstrated better risk-adjusted returns. That makes me think that now is actually a pretty good time to be looking at a quality exposure given the uncertain environment we face.”
BetaShares offers the Global Quality Leaders ETF (ASX:QLTY) as one way to access this group of stocks.
2. Global energy producers – A recovery play
The oil market experienced cataclysm this year due to the double-whammy of a demand shock because of lockdowns and a supply shock from the Russia-Saudi Arabia price war. But Harper refers to the famous saying: “The cure for low prices is… low prices”. At the time of writing, we’re already above +$30 per barrel (“+” for emphasis that prices are not negative).
He reckons the shock the system is sowing a “stars aligning” moment for mega-cap energy stocks, which are likely to emerge on the other side stronger as companies/countries curtain production, weaker producers go bust, cheap gas spurs demand and lockdowns gradually lease.
“I feel fairly confident about this. Oil is still the preeminent energy source for the global market. If we see a recovery in global demand and activity, energy is likely to be the primary and first source of energy demand that comes through, so buying energy stocks at today’s level could appear attractive from a long-term view.”
While global energy producers have seen their share prices tumble ~50% from their highs at the start of this year, their balance sheets remain solid and they have plenty of access to liquidity, according to Harper.
“And you could even argue that they may benefit long-term because the strength in their balance sheets could allow them to pick up arguably distressed assets at reduced prices throughout this period to help them bounce back stronger as the market ultimately recovers.”
The BetaShares Global Energy Companies ETF - Currency Hedged (ASX:FUEL) is one way to access a portfolio of big oil stocks including ExxonMobil, Shell and BP.
3. Cybersecurity – The essential service to technology
No doubt many Livewire readers have come across views from fundies espousing the long-term benefits of America’s elite ‘FAANG’ stocks (Facebook, Apple, Amazon, Netflix and Google), Asia’s emerging ‘BAT’ trio (Baidu, Alibaba and Tencent) and homegrown heroes in the ‘WAAAX’ group (WiseTech, Appen, Afterpay, Altium and Xero).
But Harper reckons there’s one critical theme that binds all those technologies together and is being overlooked by investors: cybersecurity.
“Whether its software technology, hardware, contactless payments, robotics, AI, driverless cars, internet of things. Every single one of those requires cyber security protection and even more so as their usage grows. So, to me, cybersecurity sits above every other area of technology as sort of the overarching umbrella.”
This is supported by fresh research from the Australian Cyber Security Growth Network, which indicates that spending money to protect IT infrastructure is set to accelerate due to COVID-19 as many of us are now working outside our organisation’s physical walls. Spending is set to surge by 86 per cent to US$270 billion by 2026.
BetaShares’ Global Cybersecurity ETF (ASX:HACK) offers exposure to a portfolio of leading companies including Palo Alto Networks, Zscaler and Cisco Systems, whose businesses include cloud security, customer data and employee identity protection and the provision of secure network access.
Tip: The ASX publishes its Investment Products Monthly Update here. Access these reports to see a full list of ETFs available including details such as fees, size and performance.
ETFs are one of the fastest growing investment vehicles in the Australian market. For a full range of products available to investors, please visit BetaShares website