A. Stotz All Weather Strategy – July 2021

The All Weather Strategy outperformed a traditional 60/40 portfolio by 0.9% in July 2021. Reopening of Western economies should drive these equities, and we expect strong commodities demand from Western and Chinese recovery. Risks: Inflation turns out transitory, new government-mandated shutdowns.

The A. Stotz All Weather Strategy is Global, Long-term, and Diversified:

• Global – Invests globally, not only Thailand
• Long-term – Gains from long-term equity return, while trying to reduce a portion of losses during equity market downturns
• Diversified – Diversified globally across four asset classes

The All Weather Strategy is available in Thailand through FINNOMENA. Please note that this post is not investment advice and should not be seen as recommendations. Also, remember that backtested or past performance is not a reliable indicator of future performance.

Review

US drove global equity and gold had a downturn

US remained strong in July

• In our June revision, we switched our 25% equity allocations to the US and Developed Europe from Emerging markets and Asia Pacific ex Japan
• US was the best-performing equity in June and July 2021, and we benefitted from this
• The economic recovery continued, and Utilities, Health Care, Real Estate, and Tech drove the US market

Developed Europe was the second-best performing equity

• Economic data shows recovery in the eurozone
  • Inflation came in at 2.2% in July, which was the first time in three years it was above the 2% target, and employment rose
• Close to 70% of the companies in the STOXX 600 beat analyst estimates, supporting the positive sentiment

Right call to switch out of Emerging markets and Asia Pacific ex Japan

• Emerging markets and Asia Pacific ex Japan were the worst performers in June, down by about 6%
• Economic shutdowns have been ongoing in Asia and Emerging markets
• US-China tensions and the Chinese government’s intervention in the Tech industry led to weak performance

Low bond target allocation at 5%

• We have a bond target allocation of 5% as they appeared less attractive relative to equity
  • The strategy is to hold only Thai government bonds, rather than a mix of global government and corporate bonds
• Besides US and Developed Europe, other equities were down; hence, the flattish return of bonds was attractive

Commodities was the best performer in July, this was driven by industrial metals

Gold recovered as the Fed re-affirmed its loose policy

• We have a minimum 5% allocation to gold
• The Fed re-affirming its accommodative monetary policy was positive for the gold price
• Gold closed the month at US$1,814/oz t

July 2021: AWS outperformed a traditional 60/40 portfolio by 0.9%

• Commodities: Best performer
• US: Best-performing equity
• Dev. Europe: Second-best performing equity

Since inception: AWS closed the gap considerably to the 60/40 portfolio in July

• The All Weather Strategy has mostly had a 45-65% equity target weight and a 25% gold allocation
• Since March 2nd: Equity 65%, Bonds 5%, Gold 5%, Commodities 25%
• Reduced downside compared to an equity-only strategy

Since inception: AWS has had lower volatility than a 60/40 portfolio

• Mostly 25-65% target weight for equity has reduced volatility
• Since gold is generally uncorrelated to equity, it has reduced the overall strategy’s volatility

Since inception: The All Weather Strategy has lost less than a 60/40 portfolio on 8 out of the 10 worst-returning days of world equity

• A key feature of the All Weather Strategy is that it aims to lose less when equity markets fall
• On the 10 worst days of Global equity since the inception of the All Weather Strategy, the strategy has lost less than the 60/40 portfolio on 80% of days

Since inception: The All Weather Strategy has outperformed a 60/40 portfolio in 59% of months

• Besides March and June, the All Weather Strategy has shown a solid year-to-date performance relative to the traditional 60/40 portfolio

Outlook

US equity should continue to be strong

• While the US economy continues its recovery, Fed Chairman Powell re-affirmed its loose monetary policy at the latest meeting
• Without tapering in the near term and continued re-opening of the economy US stocks should continue to perform

European recovery narrative strengthens

• The UK allowing fully-vaccinated travelers from the US and Europe to enter supports the positive sentiment
• Eurozone GDP growth in 2Q21 beating expectations and inflation picking up supports the recovery story

Delta variant doesn’t appear to be a threat to Western markets

• Amidst the spread of the Delta variant of the virus, due to high vaccination rates, it appears that Western countries are going to allow a continued re-opening

Government intervention weighs on Emerging markets and Asia Pacific

• Many emerging and Asian markets are in lockdown due to rising COVID-cases, which clouds the near-term outlook
• The crackdown on Tech and Education stocks by the Chinese government and continued US-China tensions could weigh on Emerging markets and Asia Pacific ex Japan
• Ongoing Covid lockdown in key Japanese cities could lead to a continued weak market

Bonds to remain weak

• As we’re expecting rising inflation, we expect bonds to underperform
• This is reflected in our 5% target allocation

China and Western recovery to drive commodities demand

• We expect a continued economic recovery in China
• Together with the recovery in the West, it should support commodities prices

We find other assets more attractive than gold in the near term

• In the longer term, as the inflation narrative spreads, it could lead to expectations of negative real rates
  • Supportive of the gold price
• While we saw a strong reaction to the conclusion of the FOMC meeting, we maintain a bearish near-term outlook for gold

Regional Equity FVMR Snapshot

• Fundamentals: US has the highest ROE by far
• Valuation: Emerging markets have the lowest PE and Japan lowest PB
• Momentum: US is up the most in the past one year
• Risk: Lowest gearing is found in Asia Pacific and Japan

Risks

Inflation turns out transitory

• The All Weather Strategy is positioned to benefit from rising inflation
• There’s a risk that inflation is transitory, which could hurt our performance
• Besides, return expectations in inflationary environments are based upon corresponding rising interest rates
• But the Fed and ECB are expected to keep rates low at least until late 2022

New variants of the coronavirus lead to new lockdowns

• If governments in countries with high vaccination rates return to lockdowns to battle new mutations of the virus, it would be negative for those equity markets

 

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