A. Stotz All Weather Strategy – April 2021

The All Weather Strategy underperformed World equity slightly in April. Rising COVID-19 cases and slower vaccine rollout could delay recovery in Asia and Emerging markets. Our equity target allocation is at 65% and commodities at 25%.

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 World equity

• Biden’s stimulus packages and Fed reaffirming near-zero interest rates add to the US recovery and inflation story
• US was the best-performing equity market in April 2021
• Other than the US, this month, Developed markets were relatively weak compared to Emerging markets

Weaker US Dollar helped Emerging markets

• A weaker US Dollar, which we saw in April, is generally good for Emerging markets
• This correlation is generally explained by US investments becoming relatively less attractive (not shown in April, though), and US$-denominated debt becomes cheaper

Asia continues fighting COVID-19

• Overall, it was the US market that drove World equity
• While the US may see the beginning of the end of the pandemic, as vaccine rollouts continue, some Asian countries have seen rising cases
• Also, the vaccine rollout is slower in many Asian economies

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

Commodities rebounded strongly

• After a weak March, commodities rebounded strongly in April 2021
• Natural gas and other fuels performed strongly, as did industrial metals and most soft commodities
• Weaker US Dollar generally means higher commodity prices
• Reflation narrative shows in commodity performance

Gold price recovered in April

• Gold has trended down in 2021, but the price may have bottomed in March
• As with general commodities, a weaker US dollar and the reflation story were positive for the gold price

April 2021: All Weather Strategy underperformed by 0.3%

• Commodities: Best performing asset
• Emerging markets: Second-best performing within equity
• Asia Pacific ex Japan: Third-best performer in equity

Since inception: Below World equity but has had lower drawdowns

• 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: All Weather Strategy has had about half the volatility of World equity

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

Since inception: Has lost less when World equity has fallen

• A key feature of All Weather Strategy is that it aims to lose less when equity markets fall
• Looking at the 10 worst days of World equity since the inception of the All Weather Strategy, the strategy has lost less on every bad day so far
• Due mainly to low equity weight; high gold allocation

Since inception: All Weather Strategy has mainly outperformed when equity has fallen

• Largest outperformance has been in the months of Mar-20, Feb-20, May-19, and Aug-19 when World equity fell the most; starting to show again in Sep-20 and Oct-20
• Gold and bonds have been an effective hedge in most of the down months

Outlook

Vaccine and stimulus drive inflation expectations

• Vaccine and stimulus news can drive up inflation further
• Fed and the ECB are open to overshoot their inflation targets due to undershooting for a long time
• This could drive inflation expectations further

Possible delay in Asian recovery

• In Asia, some countries are again seeing rising COVID-19 cases and don’t have access to vaccines to the same extent as many Western countries
• This could delay the economic recovery in Asia
• Asia and Emerging markets indices have yet to return to previous peaks

China and commodities should remain strong

• However, China’s strong demand recovery should continue, which is positive for Asia and Emerging markets
  • This demand recovery should also drive commodities further
• Strong commodities are usually good for Emerging markets

Sustained inflation expectations

• In the longer term, as the inflation narrative spreads, it could lead to expectations of negative real rates
• For the first time in 2021, the gold price has started to recover, which may be reflecting real rates expectations

Regional Equity FVMR Snapshot

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

Risk

The Fed does something drastic

• Though we are positioning the strategy to benefit during our expected inflationary (rising interest rate) environment, there are risks
• The biggest risk is that the US Fed prevents long-term US bond yields from rising, and this rallies the US stock and bond market

 

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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article.