A. Stotz All Weather Strategy – February 2022

The All Weather Strategy outperformed a traditional 60/40 portfolio by 0.8% in February 2022. Fed’s unwillingness to crash markets could drive equities higher. War in Ukraine, recovery demand, and supply-chain bottlenecks to drive commodities and gold. Risks: Inflation quickly gets under control, new lockdowns, 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

US has been the main driver of stocks

Commodities bull run since April 2020

Asset class weights since Dec ‘21

US has been the clear long-term leader

Regional equity weights since December 2021

Heavy in Western Developed markets

• In our June 2021 revision, we switched our 25% equity allocations to the US and Developed Europe from Emerging markets and Asia Pacific ex Japan
• We made no change in the September and December revisions

Rate hikes and war pushed down US

• In February, US was the second-worst performing equity and fell by 2.9%
• Fed’s expected rate hikes and the US-Russian tensions following the conflict in Ukraine led to weak equity performance
• US Tech stocks saw large falls due to high valuations

Developed Europe was down the most

• Developed Europe fell the most in February, down by 4.9%
• Besides the instability the war in Ukraine led to, it also led to uncertainty around EU’s response
• Remember, Europe is highly dependent on Russian energy

Emerging markets were down too

• Emerging markets fell by 2.9%, the third-worst performer in February 2022
• Investors looked for safe havens due to the war in Ukraine, gold being one and US$ being another
• A stronger US$ is typically negative for Emerging markets

Performance of the World stock markets

• US was hit further in February
• China, which constitutes a large part of Emerging Markets and Asia Pacific ex Japan, was hit harder
• Russia was hit hardest and constitutes about 3% of Emerging markets

The money market remained flat

• We have a 5% target allocation to the Thai money market, which was flat in February
• The main purpose of our money market allocation is downside protection
• All equities were down in the past month; hence, a bigger allocation to bonds would have been better

Commodities continued strongly

• In the past 3 months, Commodities was the best performer among all the funds AWS invests in
• Only Gold was better in February 2022 when commodities returned 3.9%

War in Ukraine drove commodities

• As Russia invaded Ukraine, commodities rose by 3.9% in February
• Russia is a big exporter of many commodities, and Ukraine is big in agriculture
• WTI oil closed the month at $96/bbl

Gold was best in February 2022

• We have a 5% target allocation to Gold, which was up by 6.5%, and closed February at US$1,909/oz t
• The yellow metal served as insurance when investors fled to safe havens due to the war

Past 3 months: AWS has outperformed as equity has fallen

• AWS: 3.3% above the traditional 60/40 portfolio
• Commodities: The best performing asset
• Dev. Europe: Second-best performing equity
• US: Third-best performing equity

February 2022: AWS outperformed by 0.8%

• AWS: 0.8% above the traditional 60/40 portfolio
• Commodities: The second-best performing asset
• US: Second-worst performer
• Dev. Europe: The worst performer

Significantly above a traditional 60/40 portfolio

• Since its inception, the All Weather Strategy has mostly had a 45-65% equity target weight and a 25% gold allocation
• The strategy was 5.2% above a 60/40 portfolio by the end of February 2022

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 the 60/40 on 80% of days

AWS outperformed a 60/40 in 64% of months

• In 23 out of 36 months, the All Weather Strategy has beaten a traditional 60/40 portfolio

Weights: Raise gold, reduce equity

• We reduce equity to 45% from 65%
• Increase gold to 25% from 5%
• Keep commodities at 25% and bonds at 5%

Outlook

Expect high volatility in the near term

• In the near term, we expect equity to remain volatile due to the war in Ukraine
• We reduce the equity allocation to 45% from 65% and raise gold to 25% from 5%

Weights: Reduce Developed Europe to 5%

• We keep US at 25%
• Reduce Developed Europe to 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

The market is certain of a March hike

• The market is pricing in a 100% certainty of a Fed rate hike in March 2022
• The market prices in 24% probability of a 0.50-0.75% target rate vs. in early February when the implied probability of such hike was only 6%

No QT yet

• Even if the Fed tapers and hikes rates, we expect the course to be reversed as soon as markets start falling
• Given the ongoing war in Ukraine, the Fed may not be raising rates as aggressively

Strong US$ hurtful to Emerging markets

• Fed rate hikes and tapering are likely to result in a stronger US$ and less global liquidity, which could hurt Emerging markets
• 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 for EM

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

Bonds to remain flat

• In the near-term, we think bonds will underperform equity
• This is reflected in our 5% target allocation
• 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 papers are typically less negatively impacted due to shorter duration

Energy prices to rise further

• The energy supply-demand imbalance supports higher prices
• Europe’s Russian energy dependence is going to influence events in energy markets

Supply disruptions drive prices higher

• Besides energy, Russia is an exporter of many industrial metals, and Russia and Ukraine are both important exporters of soft commodities

Further shocks could come

• Further supply shocks could come from war-related events or sanctions against Russia; likely volatile oil and natural gas prices
• Recovery demand, inflation, and the war in Ukraine lead us to keep our 25% target allocation to commodities

Uncertainty should support gold price

• Ukraine war spurs uncertainty; safe havens like gold are attractive
• Inflation expectations could rise on commodity supply bottlenecks
• We raise our gold allocation to 25% from 5% to make the portfolio more defensive

Regional Equity FVMR Snapshot

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

Risks

Inflation quickly gets under control

• The strategy is still positioned to benefit from rising inflation at the beginning of 2022
• There’s a risk that inflation is transitory and falls faster than we expect, which could hurt our performance
• A quick resolution of the war in Ukraine would also likely lead to lower commodities and gold prices

New variants could still lead to shutdowns

• Even though we think most countries will be less likely to lock down due to Omicron, it could change quickly
• New mutations could also arise, leading to new shutdowns globally or in specific countries, which would be negative for the related equity markets

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.