A. Stotz All Weather Strategy – April 2022

The All Weather Strategy was down but outperformed a traditional 60/40 portfolio by 1.2% in April. Fed’s unwillingness to crash markets to support equities. War in Ukraine, demand for necessities, and supply-chain bottlenecks to drive commodities and gold. Risks: Inflation quickly gets under control, global recession, Fed rate hikes crashing the US market.

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

Performance of the World stock markets

• US NASDAQ was the worst performer in the past month, NYSE was weak too
• Most Asian markets were down, too, China continued to fall
• Key European markets fell, but less than US and China

April 2022 was the 12th worst month on record for the NASDAQ

A more positive spin, the 2022 drawdown was just at the S&P500 average

A more positive spin, putting things in a long-term perspective

• Based on S&P 500 data since 1929, with a holding period of 5 years, you are 90% likely to earn a positive return
• If you extend the holding period to 10 years, you have a 94% likelihood

World stocks and the US took a hit

• In 2021 World stocks were up 19.0%
• YTD2022 they were down 12.8%
• In April 2022, World stocks dropped by 8.0%

25% weight to the worst performer, US

• We have a 25% target allocation to US equity, which was down 9.0% in April 2022
• Concerns about an economic slowdown, high inflation, and monetary tightening drove down the market

Europe is facing the same concerns as the US, and energy issues; down 2.0% in April

• We have a 5% target allocation to Developed Europe equity
• Also, concerns about economic slowdown, high inflation, and monetary tightening
• Battling with its energy dependence on Russia

China and US$ dragged on Emerging markets, which were down by 5.6% in April

• We have a 5% target allocation to Emerging markets equity
• Emerging markets performed the worst as the US$ strengthened and China fell
• A stronger US$ is typically negative for Emerging markets

Asia Pacific ex Japan fell by 4.6% in April 2022

• We have a 5% target allocation to Asia Pacific ex Japan equity
• China and Taiwan, which constitute about 55% of the index, both fell significantly

Japan was only down by 1.8% in April

• We have a 5% target allocation to Japan equity
• BoJ’s continued support of the Japanese market seems to have paid off
• The Yen has weakened significantly, which is positive for exporters

Global Bonds are down 11% YTD

• Market participants have reacted to Central banks signaling tightening
• The “Bloomberg U.S. Treasury Total Return Index” has recorded its worst performance since its inception in 1973

Thai money market stayed flat

• Rather than Global Bonds, we have a small 5% target allocation to the Thai money market, which was flat as expected
• The main purpose of our money market allocation is downside protection

Food prices have risen

Goods and energy prices have risen

• Stimulus has driven US inflation
• Failed energy policy has driven EU inflation

Commodities were up the most in April at 3.8%

• We still have a 25% target allocation to Commodities
• Commodities have been on a bull run since April 2020

Energy and Agriculture saw a continued rise in prices

• Energy and Agriculture, which are necessities for survival, drove performance; WTI closed April at $104/bbl
• Russia and Ukraine are big exporters in both categories, which has disrupted supply

Gold was down slightly in April 2022

• We have a 25% target allocation to Gold
• The yellow metal closed the month at US$1,896/oz or down by 0.6%

April 2022: 1.2% outperformance by AWS

• AWS: 1.2% above the traditional 60/40 portfolio
• Commodities: Best performing asset
• Gold: Third-best performing asset
• US: Worst performer

Above a traditional 60/40 portfolio

• The strategy was 9.6% above a 60/40 portfolio by the end of April 2022

AWS has shown a strong performance

• AWS has had a higher return and risk-adjusted return in all periods
• Also, a higher drawdown-adjusted return

AWS has experienced less volatility than a 60/40

• Mostly 25-65% target weight for equity has reduced volatility
• Since Gold is generally uncorrelated to equity, it has reduced the overall AWS volatility

AWS has lost less on 8 out of the 10 worst days

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

AWS outperformed a 60/40 in 66% of months

• In 25 out of 38 months, the All Weather Strategy has beaten a traditional 60/40 portfolio

Outlook

Expect continued high volatility in equity markets due to the war in Ukraine

• In our revision in March 2022, we reduced the equity allocation to 45% from 65%
• And raised gold to 25% from 5%

Expect Fed to support the US market

• American companies are doing well and have global pricing power
• US economy to remain strong thanks to Gov’t spending
• Biden and the Democrats need Powell to prop up markets ahead of the November mid-terms
• So, we have a 25% target allocation to US equity

Fed hike in May is priced in

• The market is pricing in a 100% certainty of another Fed rate hike in May 2022
• The implied probability is 99.8% for a 0.5% hike to a target rate of 0.75-1.00%

The market has changed expectations to an even more aggressive Fed

• Market was expecting 2% by YE22, now 3% (Current: 0.25%-0.5%)
• Fed needs to balance inflation with increased recession expectations
• We expect the Fed to be cautious due to the war in Ukraine and not risk a market crash

Strong US$ hurts Emerging markets

• Fed hikes and tapering are likely to result in a stronger US$ and less global liquidity, which could hurt EM
• Also, US$ is considered a safe haven, meaning it can strengthen further as a result of the war in Ukraine

China’s heavy weight matters

• China’s heavy weight in the Emerging markets and Asia Pacific ex Japan indices could continue to drag on performance

Bonds to remain flat

• We have a low 5% target allocation to Bonds
• Our allocation is to the Thai money market, so a Fed rate hike should have little to no impact
• In addition, if we were to see rate hikes in Thailand, short-term paper is typically less negatively impacted due to shorter duration

Commodities set to go higher

• We have a 25% target allocation to Commodities
• Demand for necessities (food and energy), inflation, and supply-chain disruptions related and unrelated to the war in Ukraine are going to drive the asset class higher

Energy prices to remain high, WTI closed April at $104/bbl

 

• Europe’s Russian energy dependence is going to continue to influence the energy markets
• Russia recently cut gas supplies to Bulgaria and Poland

Ukraine war disrupts supply

• Besides energy, Russia is an exporter of many industrial metals, and Russia and Ukraine are both important exporters of soft commodities
• Putin’s move to avoid settlement in, for example, US$ or EUR is likely to be another disruption in the commodities markets

Metals prices are on the rise too

• Russia supplies almost 20% of global high-quality nickel used in EV batteries
• The precious metal palladium is mainly used in catalytic converters for cars, and the EU gets more than 40% of its supply from Russia

And food is getting more expensive

• Natural gas is used in fertilizer; higher fertilizer costs lead to higher grain prices
• Also, Russia and Ukraine account for 15-20% of the global supply of corn and wheat
• Corn is a primary input for feed grain of livestock and poultry, driving up meat prices
• Wheat is an important ingredient for bread, pasta, snack food, and cereals; Egypt and Turkey get more than 70% of total wheat imports from Russia and Ukraine

We keep gold as an insurance

• Target weight of 25% as an insurance
• The war in Ukraine spurs uncertainty, and Inflation expectations could rise, making gold attractive
• Though expected rate hikes and recession concerns are negative

Regional Equity FVMR Snapshot

• Fundamentals: US has the highest ROE by far
• Valuation: EM has the lowest PE and Japan the lowest PB
• Momentum: Only Dev. Europe is up in past 1Y
• Risk: Lowest gearing is found in Japan

Risks

Inflation quickly gets under control

• The strategy is still positioned to benefit from rising inflation through a 25% Commodities allocation
• A quick resolution of the war in Ukraine would ease the pressure on Energy prices
• The Chinese shutdown reduces energy demand and could lead to lower prices
• Other commodities could fall with energy prices too, as it’s part of the production cost

Global recession pushing down stocks

• New Covid mutations could arise, leading to new shutdowns globally or in specific countries, which would be negative for the related equity markets
• We have started to see yield curve inversion, which has historically been an accurate predictor of recessions
• Since 1970 in the US, the average time from inversion until the recession started was about 12 months

Fed rate hikes crashing the US market

• If the Fed would surprise and not be cautious about rate hikes, it could impact the US stock market negatively
• The US stock market usually has a global impact; hence, it would hurt other equity markets too

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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.