Global Leaders Portfolio – 30th April 2020 rebalance

Hi, today I am writing a short post on the monthly rebalance I have made to the Global Leaders Portfolio (GLP) as of end April 2020. I am effectively adjusting the portfolio to the current business cycle phase, which is contraction. The US economy has peaked in February 2020 after a decade long expansion, which was the longest ever in the US history. Official 1Q20 GDP reading was -4,8% vs. estimated -4,0%. Only like 25% of the quarter was covered by the Covid-19 stress and shutdowns across Asia, Europe and America. This shows how severe the impact of the virus on the economy is and how deep the devastation to both aggregate supply and demand side is. There is obviously a lot more pain to come in 2Q20 as that’s when the shutdowns are playing out. Estimations of 2Q20 US GDP drop balance anywhere between 20-30% on annualized basis. For EU and Japan the estimates are a bit more optimistic but still around -10% or more for the respective period. On average the Developed Economies are due to contract -16,6% annualized in 2Q20 according to Bloomberg. Whole 2020 real GDP growth, as of current Bloomberg estimates, is about to be -1,5% with 2Q and 3Q taking the most hit.

SIA suggests that maximum equity exposure during contraction should be 20%. As of end March it was 34%. The cut down to 20% should have happened at end of March really, as it did in Pension Portfolio (PP), but I have decided to keep it higher for one month to test the relative strenght of GLP’s equity basket throughout the S&P500’s historic 35% plunge (peak to through) in February/March and an even more amazing 35% (through to peak) comeback that happened afterwards. Luckily the fact that all 11 names from GLP equity basket fulfill the SIA Score has criteria plus the fact that Covid-19 crisis has on relative basis hit much more the old vs. new economy sectors has given it quite a bit of resilience thus far. As an effect from the inception date of GLP (28th January 2020) up untill 30th April the equity part of the portfolio has lost “only” 4,5%. In that respective period the Dow Jones Industiral Average (INDU) index of heavy-weight industrial bluechip stocks was down 14,8%, wide market benchmark S&P500 was down 10,5%, whilst high-tech index Nasdaq was down 3,4% (much more inline with our basket, which mostly consists of high-tech and pharma names). My conclusion here is that (at least for now) the contraction (or later recession when in the future offically named so by appropriate offices) we have underway seems to be promoting the new economy sectors, which are much less exposed to all the negative effects of shutdowns and all the changes in social behaviour as a result. Also the fact that they usually have much lower fixed costs base, less debt (or are even cash positive) and operate in sectors which are much earlier in their life cycles than the old economy sectors, adds an additional positive skew to their valutions. It seems, just my view, that the current contraction will be a structural one, rather than cyclical, and might only speed up the inevitable switch of the wrold’s economy from offline to much more online. This trend has been very clear since the Great Financial Crisis (GFC) already, but what happens right now might only accelerate it int he future (again just my humble view).

The Rebalance

GLP equity allocation is being cut to max 20% and will stay so in the coming months untill we have clear signs as to when the economy might be behind the currect contraction’s through.

No new stocks are being added to the equity basket for now, but in coming months opportunistic purchases of new stocks, which pass the SIA Score, are possible. No stocks dop out of the basket as of end April as well.

Stocks are traded at the closing price on the rebalancing day. Each stock exposure is cut by 41% respectively (1-20%/34%).

Part of the proceeds from the sale of part of equities holdings are spent to increase the weight of gold (GLD) in GLP and the remainders will be held in cash for now, increasing the GLP’s cash buffer, which will finance future purchases mentioned above.

As to GLD – given the unprecedented scale of ECB, Fed and BoJ monetary stimulous, as well as wide and massive scale fiscal stimulous from most of the world’s governments, the GLD ETF is expected to increasingly play a role of inflation expectations hedge. Meanwhile, as the contraction unfolds, GLD is also the portfolios safe haven anchor.

Current structure of the GLP can be found on Portfolios page.

Total Personal Return since inception (TPR) o GLP as of 1st May 2020: +5,6%.

Next update in a month.

I wish all of you best of luck and least of trouble during the unfolding contraction. Stay wise and keep preparing to restructure your holdings in a way that will be best suited for the next bull market.

Yours,
PC