A. Stotz All Weather Strategy – December 2020

The All Weather Strategy performed in line with World equity in December as Emerging markets and Asia Pacific ex Japan performed strongly. Vaccine news and stimulus lead to positive sentiment. Our equity target allocation is at the strategy maximum of 85%.

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

Equity markets climbed higher in December 2020

• Equity markets climbed higher as investors continued to put money into risky assets, and we benefitted from our 85% equity allocation
• Vaccine news and stimulus expectations have driven the optimistic sentiment

Emerging markets and Asia Pacific ex Japan were the best

• Emerging markets and Asia Pacific ex Japan were the best-performing equity markets
• We had a 25% target allocation to both, which supported the strategy’s performance

Emerging beat Developed markets

• December was a month of Emerging markets beating Developed markets
• Heavy-weighted markets like China, Taiwan, India, and Brazil performed well
• A reason for Emerging markets optimism has been that important economies, e.g., China and Taiwan, handled the COVID-19 pandemic well and have seen a lesser negative impact

Low bond allocation was the right decision in December 2020

• In the latest revision, we reduced our bond target allocation to 5% from 15% as bonds 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
• Keeping bonds at the minimum weight of 5% was a good decision, as equity outperformed in December 2020

Commodities advanced further in December 2020

• Our commodities target allocation remained at 5% in our latest revision
• In December, most commodities did well based on vaccine news and a continued Chinese recovery
• Energy and agricultural commodities performed especially strong in December

Gold price recovery

• Gold was the strongest performer in December 2020 as the price recovered on stimulus expectations
• As such, our reduced target allocation of 5% was an incorrect call in December

December 2020: Max equity allocation and performance in line with the market

• All Weather Strategy: Performed in line with World equity
• Emerging markets: Best performer in equity
• Asia Pacific ex Japan: Second-best performer in equity
• US: Best performer among developed markets 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 December 3rd: Equity 85%, Bonds 5%, Gold 5%, Commodities 5%
• Reduced downside compared to an equity-only strategy

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

• The volatility of All Weather Strategy has been about half the volatility of World equity
• Since inception, a 25-65% target weight for equity has reduced volatility
• As gold is generally uncorrelated to equity, it has reduced the overall All Weather Strategy 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

Risk on

• Vaccine news has led to risk-on mode in the markets (even though Thailand and Europe right now are seeing stricter restrictions)
• It takes time until those vaccines are widely available, but financial markets are forward-looking and price in a recovery
• Vaccine news, stimulus, and stimulus expectations can drive stock markets further

Downward pressure on the US Dollar and Chinese recovery to benefit Emerging markets

• Stimulus could also put downward pressure on the US Dollar, which should be positive for Emerging markets and Developed Asia
• China’s strong demand recovery to continue, which we see as a positive for Asia
• We also see this as an essential driver of Emerging markets equity

Long-term issues remain

• The US remains overvalued, and the US gov’t debt is growing every day
• Even when COVID-19 is under control, many concerns remain, e.g., geopolitical tensions and mass unemployment
• So, while we’re now at the max allocation of 85% in equity, we’ll reconsider our target weights in less than three months

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 up the most in the past one year
• Risk: Lowest gearing in Asia Pacific including Japan

 

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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.