A. Stotz All Weather Strategy – January 2021

The All Weather Strategy outperformed World equity in January as Asia Pacific ex Japan and Emerging markets continued strongly. Western markets await new catalysts, and China drives the East. 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

We’re not r/WallStreetBets or Elon Musk

Gamestonk!! https://t.co/RZtkDzAewJ

— Elon Musk (@elonmusk) January 26, 2021

• Unlike the meme-stock craze that originated from Reddit’s r/WallStreetBets, and was escalated by Elon Musk and other billionaires
• The All Weather Strategy doesn’t chase short-term returns in high-risk bets but rather follows a slow-and-steady-wins-the-race approach

World equity was down slightly in January 2021

• Developed markets underperformed Emerging markets
• Though Emerging markets still showed positive performance for the fourth month in a row

Asia Pacific ex Japan and Emerging markets were the best within equity

• We had a 25% target allocation to both, which led to the strategy’s outperformance
• US was the second-worst performing, which dampened All Weather Strategy’s return

China continues strongly, no news to drive Western markets higher

• China helped drive Asia Pacific ex Japan and Emerging markets higher
• No additional positive vaccine news to help Developed Europe equity
  • The opposite, with AstraZeneca delays
• No additional stimulus announcements from the FOMC meeting led to subdued performance of US equity

Low bond target allocation at 5%

• In the previous revision, we reduced our bond target allocation to 5% from 15% 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 was the second-best performer in January 2021

• Our commodities target allocation remained at 5% in our latest revision
• In January, energy and industrial metals continued to do well as the industrial part of the global economy resumed its rebound
• Some agricultural commodities performed well as demand from Asia was strong

Gold fell back in January after a strong performance in December 2020

• It was the second-worst performer in January, so for the month, our reduced target allocation of 5% helped the strategy’s performance

January 2021: All Weather Strategy outperformed by 2%

• All Weather Strategy: Outperformed World equity by 2%
• Asia Pac ex Japan: Best performer in equity
• Emerging markets: Second-best performer in equity
• US: Second-worst 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 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

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

Western markets await new catalysts

• Western markets appear to await stimulus, vaccine, or other positive news to push equity markets higher
• US markets seem to await new stimulus from new president Biden
• EU is facing vaccine challenges; the recently-free UK, not to the same extent

Prefer Asia Pacific ex Japan and Emerging markets

• China’s strong demand recovery to continue, positive for Asia and Emerging markets
  • This demand recovery could also drive commodities further
• Vaccine and stimulus news can drive stock markets further
• We prefer Asia Pacific ex Japan and Emerging markets within equity

Inflation narrative on the rise

• In the longer term, we expect inflation to rise
• As the inflation narrative spreads, it could lead to expectations of negative real rates
• Such expectations could drive more money into risky assets, e.g., equity
• Increased inflation expectations could also be positive for gold and commodities

Long-term issues remain

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

Regional Equity FVMR Snapshot

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