How to refresh your portfolio as the stockmarket recovery pauses

The recovery in stockmarkets which started in mid-June is due a breather, which makes this a good time to review your portfolio and make some changes.

Each bull market is never the same as the last and it’s worth looking back at previous cycles to look for clues.

The shares that bounce fastest are usually those that went down most, but this doesn’t last. UK banks were hammered in the financial crisis but rebounded in the 2009 market recovery. Since then they have been poor performers, as have insurance companies. What led the subsequent bull market was growth companies, not financials.

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Likewise, technology, media and telecoms stocks bounced back in 2003 but while some went on to become great companies, most didn’t. In particular, media companies had to reinvent themselves for the digital age and telecoms companies discovered that over-investment in the bull years led to excessive competition and capacity. Vodafone and BT have never regained momentum.

The worst victims of the Covid sell-off in early 2020 started to recover in the summer, when investors realised that they weren’t going bankrupt and eventual recovery seemed in prospect. Six months later, the recovery in their share prices fizzled out and the shares of Rolls-Royce, Tui, Carnival and International Airlines, among others, have been sliding ever since. Recovery, it turned out, would be a complicated, expensive and long drawn out process

It’s not as simple as switching from growth to value

The message for the new bull market would seem to be to switch out of growth stocks after the bounce and into value, but it’s a bit more complicated than that. Changes of market leadership are not just the result of fashion and the desire of fund managers for a change of tune.

UK and European banks, for example, were crippled after the financial crisis by taxation, regulation and political intervention, which turned them into rotten businesses. US banks, however, have performed well.

Solvency regulations have been terrible for UK and European insurers but US insurance companies have prospered. UK investors who bought into Polar Capital’s Financial Trust (LSE: PCFT) or their insurance fund have done far better than those who stayed in the UK.

The technology companies that became enduring winners after 2003 were those with viable business models, strong market shares, positioned for the opening of new markets and offering products or services with obvious appeal. This meant Apple and Microsoft, not Dell or Hewlett Packard. Amazon, once an online retailer of books and CDs, used its expertise in logistics to become a low-cost online general retailer. It also established a duopoly with Microsoft in the new area of cloud storage, making mobile computing possible.

Many technology and technology-related companies will continue to prosper and new ones will become giants from small beginnings. But many more will disappear without trace.

Rather than pick and choose, it might be better to invest in Polar Capital Technology Trust (LSE: PCT) and Allianz Technology (LSE: ATT) and leave it to the managers to do the spadework. For broader exposure to growth, the Baillie Gifford Trusts, including Scottish Mortgage (LSE: SMT), are the obvious funds to stick with.

Doing nothing is a mistake

The winners in the bear market have been the energy stocks, but oil prices are now coming down and gas prices will surely follow. This is reflected in the cautious valuation of the sector.

But there is another factor to bear in mind – the growing political, media and public hostility to these companies in the UK. This promises higher taxation and more regulation, if not now, then in the future. North American companies are probably a safer bet than those in the UK.

Europe and the UK respond to crises with regulation and taxation while the US fixes the problems and moves on. With another UK sector coming under the cosh, this could be a good time to reduce UK exposure following out-performance this year and switch to the US.

This also applies to renewable energy, which has seen profitability and net asset values boosted by higher electricity prices. Either prices will fall or the UK will levy extra taxes on those profits, making a switch into funds focused on North America a safer bet.

The cryptocurrency and NFT (non-fungible token) bubbles have well and truly burst and it is very hard to see how they could be reflated.

The biggest disappointment in the last year has been the dull performance of gold and gold mining shares. If these could not prosper at a time of rising inflation worries, when will they perform? Is it time to sell?

The trouble is that it is all too common to throw in the towel on a disappointing asset class (such as oil & gas shares two years ago) only to see them soar subsequently. Gold and gold miners are at least reliable protectors of value in bear markets. Sell in haste and repent at leisure.

There are no easy answers about what to hold and what to sell. Some household names will disappear into obscurity and some seemingly ropey start-ups will go on to great things.

It’s tempting to do nothing, but that would probably be a mistake. This is a good time to follow the old adage of running your winners and selling your losers. A realised loss is soon forgotten, but an unrealised one hangs over a portfolio and occupies a disproportionate amount of attention. It’s better to reinvest in a share or fund that will prosper in the new bull market.