Hello Smart Investors! Another month passed and it’s time to look at the SIA-style exemplary portfolios to see how they are and if there’s an adjustment needed. But first let me start with a few words on the recent main drivers and themes that drove capital markets.
Most of the economies were slowly, but steadily, being reopened. The Covid-19 new cases and deaths trajectory was clearly calming down throughout the month of May (you can check current trends here and here). Global daily cases dropped from close to 30k at the end of April to below 20k now as I write this post. There has also been quite a few positive developments on the vaccine front, with Moderna and other US pharma companies announcing substantial progress with their vaccine tests. This clearly drove investors’ expectations higher for a relatively quick comeback to normality, after the virus effects subside. As an effect the equity markets kept diverging from the the current state of economy, which is bad. All across Asia to EU to USA the main macroeconomic data for April were hitting long time or even historical lows (I wrote about it in my Weeklies here, here and here). The Economist (and not only them) made a big call of Wall Street (capital markets) diverging with Mail Street (real economy). There’s been a continous disbelief in the continous move higher by equities, which only kept even more vibrant. Even the constantly increasing tensions between China and US did not manage to drive markets lower, although my personal view is that this issue is again little bit too ignored. Effectively the markets ended the month with solid gains: S&P500 +3.1%, Nasdaq +1,8%, EuroStoxx600 +3%, DAX +4.6% , Nikkei +7.3%. Additionally to that oil, one of the direct triggers of the Feb/March panic, has recovered as global demand rebuilds, safe havens like USD,CHF weakened.
While looking for some reasons of the divergence and trying to figure out whether it’s sustainable or not, there’s a few things that are very clear to be seen:
* Liquidity injections from the central banks and governments with no precedence in size and aggression: the Fed’s total assets on their balance sheet shoot up from $4.2 trillion at the start of Feb to as much as $7,1 trillion now. That’s a 70% jump in just 4 months! It’s nicely depicted here. Similar tendencies can be seen in case of any other major central bank around the world, including BoJ (see here) and ECB (see here). Additionally the goverments, especially in developed countries, pushed their fiscal Covid-19 responses to the limits. US only introduced the following by 21st May (data from the IMF): US$483 billion Paycheck Protection Program and Health Care Enhancement Act, US$2.3 trillion (around 11% of GDP) Coronavirus Aid, Relief and Economy Security Act (“CARES Act”), US$8.3 billion Coronavirus Preparedness and Response Supplemental Appropriations Act and US$192 billion Families First Coronavirus Response Act. They together provide around 1% of GDP. IMPACT ON MARKETS: after the Great Financial Crisis (GFC) the investors had the so called Fed Put up to the Fed’s committed Quantitative Easing (QE) limits, whilst now the markets effectively have an Unlimited Fed Put and a Massive Government Put. Similar applies to other regions of the world. JPMorgan’s latest estimate is that “global cash balances outside the banking system will likely expand by 20%, or 17% over the coming year, similar to the post Lehman experience”. Liquidity is plenty again.
* Short-term interest rates are practically zero and will stay so for a long period of time: that means that cash and equivalents are for free and as cash is plenty (see above), it chases riskier assets (bonds plus equities) in the search for returns. Dividend cuts have been massive recently, but even with that being the case the yield on equities is much higher than bonds (5% vs. 1% according to JPM) and higher for bonds than cash (1% vs. 0%). IMPACT ON MARKETS: this creates a constant bid to risky assets.
* Short covering: the short base was generally pretty big after the downside volatility burst in Feb/Mar and now, as volatility normalizes, a lot of the marignal bid to equity markets is actually short covering. IMPACT ON MARKETS: this creates a constant bid to risky assets until the short base covers down to its more natural levels.
* Underperformance of Value Stocks: this group of stocks has been a laggard on the way up so far. This explains, possibly, that the whole move up is not really driven by high expectations of future growth, but rather all the reasons mentioned above. IMPACT ON MARKETS: as long as the run higher is not based on fundamental growth expectations, the market volatility can remain increased.
* Reopening of the economy: people have been in lockdowns for almost 3 months now and naturally not only their real business activities, but also their expectations as to the economic futures were dumped to unprecedented levels. Now, as the world reopens, people can look again into a hopefully brighter future again. IMPACT ON MARKETS: positive.
* Improving credit spreads: ICE BofA US High Yield Spread (see it embedded under Markets&Macro) keeps normalising (6.7% now vs. almost 11% at the midst of the downturn). This means that liquidity in the corporate debt markets is improving and that risky debt issuers still find access to financing and even manage to get it cheaper than 1-2 months ago: IMPACT ON MARKETS: stabilisation of HY rates is always positive for equities as it means ample liquidity and less liquidity problems for indebted companies.
Now, let’s take a look at the Global Leaders Portfolio (GLP)…
The Rebalance
We are still in contraction according to our major allocation tool (Enhanced Aggregate Spread/Mr.Model). The maximum equity allocation treshhold must then remain at 20%. Meanhwile, given how good the equity markets performed in last month, the aggregate weight of the equities part of GLP increased above that level from 19.6% to 21.8%. I am thus adjusting it back down to the 20% limit by trimming positions in GLP’s recent outperformers with weights above average: Electronic Arts (sold 25% of position), NVIDIA (sold 24% of position), Service Now (sold 25% of position).
For the sale proceeds I added to GLD holdings not to dilute the portfolio with cash further, as I already have a 13% cash buffer.
No new stocks are added to GLP, no names drop out of GLP this month. All of them still fulfill SIA Score and those expecting much action on the portfolios every single month: remember that this is a long term thing here and SIA Score is a long term selection tool, no playing around every once in a while. Most possibly we’ll rather add new stocks to GLP going forward to keep diversifying it with good value-added stocks that match the SIA philosophy. More on this possibly next motth.
The anchors of the GLP performed as follows in May:
TLT moved -3.2% in May as an effect of an unwind of the massive “flight to quality” (a technical term used to describe a situation when investors look to hide their holdings in safest possible assets while selling out of equities in times of market turmoil) that pushed it higher in Feb/March.
GLD effectively gained 2.5% in May expresing investors’ further expectations of (a) higher inflation in the future (b) Gold still being a value carrier as times are uncertain.
Portfolio holdings are traded at the closing price on the rebalancing day.
Current structure of the GLP can be found on Portfolios page.
Total Personal Return since inception (TPR) o GLP as of close 29th May 2020: +7.8%.
Next update in a month.
Yours,
PC
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 Regulation of the Polish Minister of Finance of 19 October 2005 on information constituting recommendations regarding financial instruments, their issuers or exhibitors (Journal of Laws of 2005, No. 206, item 1715) 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 claimed eligibile for any losses of a third party resulting from trading activities based upon this article. 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.
