October Portfolio Update


Tech stocks continue to drive markets


Apple and Microsoft investors aren’t the only ones smiling, as the US market rides the coat-tails of its leading tech giants

A key theme we’ve seen this year is the strength of the US tech sector. Rallying 36% year-to-date, tech stocks account for almost a third of the 22% rise in the S&P 500. The sector has been at the heart of a series of all-time market highs, with few signs this trend is about to fade.


During October this theme continued to unfold, in no small part because of the upbeat quarterly results posted by the sector’s heavyweight names, and as we inch closer to a US-China trade deal. Despite macroeconomic headwinds, tech companies still have the potential to deliver strong earnings growth. This is central to our preference towards this sector.


Apple (APPL) is leading the way, shrugging off concerns relating to competition, trade tariffs and demand for the iPhone 11. Instead, it delivered revenue growth, earnings well above forecast, and upgraded its guidance for the December quarter.


While Apple shares climbed 11.1% last month – and are up 63.2% year-to-date – the outlook remains strong. Service revenue and iPad sales are growing at a double-digit rate, while the wearables division is surging. Meanwhile, issues in China appear to be subsiding, and the company has growth set to come online via next-gen 5G products and Apple TV+.


The market’s second-largest stock, Microsoft (MSFT), also delivered a beat on earnings and revenue, rising 3.1% across the month. Growth across the board remains particularly strong, and while headline numbers for the ‘Azure’ cloud business are moderating, that is because it continues to grow from an ever-increasing base.


Beyond direct-to-consumer hardware and software stocks, the markets are also getting a lift from chip makers. Look no further than Intel (INTC), which topped forecasts on every level and surged 9.7%. The company is seeing a return to revenue growth, buoyed by cloud data centre sales and demand that the company had admitted it cannot keep up with. There is further upside yet once execution is bedded down.


Similarly, Advanced Micro Devices (AMD) leapt 17% higher across October. The company’s results reinforced the strength of the sector. Its new-release processor chips recorded significant growth, helping the business post its highest quarterly sales in over a decade, and highest quarterly gross margin since 2012.


For now, even the implication of tariffs have done little to stunt the growth of big tech. That is not to say all tech stocks are in favour. However, we are seeing a clear divergence supporting fundamentally sound tech stocks with revenue and earnings growth – those driving this ongoing bull market.


Provided there is no escalation in the US-China trade war, this growth story is likely to continue. Should we have a favourable outcome, there may yet be a further rally buoyed by the inherent strength of the tech sector.

Presenting a new investment opportunity


I’d like to briefly take this moment to draw your attention to our new ASX-focused investment portfolio, the Australian Yield Portfolio, detailed further in this letter. It’s great to be able to launch this service to investors seeking a sustainable source of income, once again free from brokerage fees.

As always, thank you for your support. If you have any questions, please contact me below.



Global Growth Portfolio Update


NAV for the portfolio increased by 1.3% during October.


This growth was largely supported by the performance of our equity positions, which gained 3.6% in value. Unfortunately, while our efforts to hedge currency movements have favoured us throughout the year, last month it weighed on the portfolio by 2.1% as the USD/AUD forex rate fell from 1.4811 to 1.4504.


Leading positive contributors towards the headline result were Apple (APPL) and Advanced Micro Devices (AMD) on account of their significant quarterly growth. Roku (ROKU) also provided a strong contribution as shares soared 44.7%, with the catalyst being news that the Apple TV app will become available through the Roku platform.


At the other end of the spectrum, McDonald’s (MCD) led those stocks which dragged on the portfolio’s performance. The fast-food giant fell short of revenue and earnings forecasts, however we take confidence in the fact that same-store global sales rose 5.9%. Fixed costs are rising, however the business is investing in technology to drive future efficiencies. Although same-store growth in the US was slightly below expectations, we believe expanding margins for company-owned stores supports the notion there is still good value here.


There were no new positions added to the portfolio in October, nor did we exit any holdings. At this time, with unrealised income representing 10.5% of all assets, we are comfortable with the diversity of equities across the portfolio.


In terms of outlook, trade tension seems to be subsiding. The market will now digest and process what appears to be the last rate cut by the Federal Reserve as part of this (short) easing cycle. This is something we’ll be taking into account as far as where we divert capital, however we remain content to wait until such time that any appropriate opportunities emerge.


Australian Yield Portfolio


I am delighted to introduce the Australian Yield Portfolio. In an environment where interest rates are at record lows, many clients have been asking me where I see an opportunity to build a sustainable source of income. It’s an understandable concern given many clients are running their own SMSF.


The fact remains, the ASX is one of the leading markets in the world when it comes to dividend stocks, where we also have the benefit of franking credits at our disposal.

Our focus with this portfolio will be identifying ASX 300 companies which either:

  • pay a dividend;

  • are likely to pay a dividend in the future;

  • have a history of growing dividends; or

  • have the ability to grow their earnings and dividends into the future

As a supplemental source of income, we will also be looking to sell call options on some of the positions in the portfolio, thereby aiding the sustainability of our returns. While income is a clear emphasis, there is also some exposure to leverage modest growth potential.

In its inaugural month, we have focused on finding appropriate investment opportunities to deploy capital, so dividends are yet to commence. Nevertheless, the Australian Yield Portfolio still delivered returns of 0.4% throughout October, outperforming the ASX 200, which declined by the same amount.


Highlighting the diversity of our focus, these gains were led by the likes of IOOF (ASX: IFL), Medibank Private (ASX: MPL) and Iluka Resources (ASX: ILU).


We’ll detail performance more closely in forthcoming reports, but moving forward we expect to implement our investment strategy to realise a sustainable source of income that caters to SMSF investors, retirees, and any other investors searching for dividends.


For further details on this new portfolio, I encourage you to get in touch with me to discuss this opportunity.

support@optionexperts.com.au

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