Dear Follower&Copiers, Big things are coming ahead of us. The Global Leaders Portfolio (GLP) is now being slowly prepared for the start of a new cycle phase starting from Jan 2021. The portfolio allocations change will be a process that in my view might last between 3 to 6 months.
Why a process? Because of a couple of reasons:
👉 Unlike in the case of a cycle phase peak (where switch from Boom phase, which is part of a bigger Expansion phase, into Contraction phase is fully specified and easier to predict) the transition of the cycle through (from contraction to Recovery) is a bit trickier to catch. Hence I naturally want to aviod wrong timing risk.
👉 This Recession is different that any other before. Vast majority of the moves in the Enhanced Aggregate Spread (EAS = EFS – ERS) were caused by the Enhanced Real Spread (ERS = CPI – Short Term Unemployment Rate (STRUC)). To be exact by the massive move up in the STRUC, as an effect of the pandemic-driven lockdowns. The Enhanced Financial Spread (EFS = 10Y Yield – Fed Funds) played a much much smaller role this time, compared to other recessions, in influencing the EAS. Actually the increase in ERS was so huge that it went out of all the possible scales, if compared to history (just to remind: STRUC rose from 300 bps to almost 1500 bps in just 2 months time). So this time around the normal EAS is not really giving the right picture in our macro forecasting tool by Dr.Robert Dieli from nospinforecast.com. There arose a need to extract the effect of lockdowns (obligatory stay-at-home orders causing plunge of economic activity) from the natural effects of the Recession underway. This is done by the institution of AEAS (Adjusted EAS), which accounts for the above mentioned effect. AEAS uses the STRUC in its AERS (Adjusted ERS), which exludes the population of workers that are on “temporary leave” (this was a massively used legal way of putting people aside for the time of lockdowns without having to fire them).
So, moving forward: the EAS already went above the 200pts treshold level (crutial in cycle-change dating process) in Dec 2020. But the AEAS only joins now with a read of 281 pts for Jan 2021. Given this fact, the bottoming out process is fairly confirmed now. Both the EAS and AEAS are above the required level and also the 6-months moving average of Nonfarm Payroll Employment has been rising now after placing a bottom in Sept 2020. To be exact, the cycle through is not called official yet. There’s more evidence needed to be sure the through is behind. Still, the signs of it coming imminently are more and more credible.
🧠🤔 What will happen next?
Going forward the equity allocation will slowly but steadily be increasing towards the Recovery-specific weight of 50-70%. Let’s remind again the equity allocaiton rules for GLP: RC: 50-70%/E:50-60%/B:20-50%/RS:0-20% (where: RC-recovery, E-expansion, B-boom, RS-contraction/recession). The process started very slowly in Dec (when I set up the GLP here at eToro) by deliberately keeping th allocaiton of equities slightly above the 20% treshold (at 25%ish). Today, as we’re starting the new year (for many reasons I couldn’t do it earlier), the process of portfolio restructuring goes on and will continue in the forseeable future).
👔💲 Actions taken today:
👉 The allocaiton of both $TLT and $GLD was cut to 28% and 29% respectively to make space for equities.
👉 The allocation fo equities was increased from 25%ish to 33% now (32,4% stocks+0,6% $SPY).
👉 The number and selection of equities does not change.
👉 I added to the 13 US stocks-listed stocks today ($VWS.CO (Vestas Wind Systems A/S), $INTC (Intel), $SQ (Square, Inc.), $GRMN (Garmin Ltd.), $NOW (ServiceNow Inc), $FB (Facebook), $AMD (Advanced Micro Devices Inc), $BKNG (Booking Holdings Inc), $NVDA (NVIDIA Corporation), $EA (Electronic Arts, Inc.), $BIIB (Biogen Inc), $SWKS (Skyworks Solutions), $SEDG (SolarEdge Technologies)), and will add to the sole EU rep tomorrow ($UBI.PA (Ubisoft Entertainment SA)). I also added tiny to the $SPY, which is a portion fo the equity holdings.
👉 The cash buffer is kept steady at appx. 10% for now. I do not expect the eToro Risk Score to be influenced much by the increased share of equities. Backtesing with even max limit of 70% in equities showed little negative impact on both Sharpe and Sortino ratios (tests done on portfoliovisualizer.com/Bloomberg). Still targeting 3-4 Risk Score at the maximum.
I will update you as things progress here.
Thank you again to all of You out there for your interactions, following and copying.
PS: please bear in mind that due to my eToro partnership for the GLP, the frequency of GLP rebalancings might differ from the usual monthly manner from before Dec 2020. Montly rebalancings are still due and planned, but are no longer the sole actions on the portfolio.
Best,
PawelCylkowski
GlobalAlphaSearch
Disclaimers: None of the ideas, views and thoughts presented here shall ever be taken as a recommendation to buy or sell stocks,bonds,FX,commodities or any other financial instruments as stated in REGULATION (EU) No 596/2014 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC or the Polish Act of 10 February 2017 amending the act on trading in financial instruments and some other acts. The article is for educational reasons and purely presents private views of the author, thus the author shall not be held accountable for any losses of a third party resulting from any potential trading activities in any instruments, both specifically or by category of assets. The author uses his best knowledge and data from sources believed to be reliable, but makes no representations as to the accuracy of the data.Full Disclaimers&Liability Limitations page.
