A. Stotz All Weather Strategy – October 2020

The All Weather Strategy outperformed as World equity fell in October. US election day won’t end uncertainty, China is driving an Asian recovery. We continue to focus on downside protection with 15% short-term gov’t bonds and 30% gold.

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

25% target allocation to Asia Pacific ex Japan drove outperformance

• In October, Asia Pacific ex Japan and Emerging markets saw gains
• Developed Europe was the hardest hit
• Raising our target weight to 10% from 5% in the US was a small drag on performance
• Our 25% target allocation to Asia Pacific ex Japan was a key driver of our outperformance in October

Bonds stayed flattish, as expected

• In the latest revision, we reduced our bond target allocation to 15% from 30% as bonds appeared less attractive
  • The strategy is to hold only Thai government bonds, rather than a mix of global government and corporate bonds
• Keeping bonds at 15% rather than 5% helped to limit the downside
  • That Thai government bond position has basically been flat since we switched to it

Commodities gained in October

• We increased our commodities exposure to 5% from zero in our latest revision
• In October, industrial metals and soft commodities performed well as Chinese demand strengthened
• Energy prices fell due to slow demand recovery
• Precious metals lost as well, even though uncertainty was high in the markets

Gold fell amidst high uncertainty

• Our target weight for gold stands at 30%
• New COVID-19 waves across the West have led to new restrictions and increased uncertainty
• Even though expectations about gov’t and central bank stimulus should support gold price, it fell back slightly in October
• It appears some investors liquidated gold in preference for cash

October 2020: Moderately low equity allocation tilted towards Asia Pacific ex Japan beat

• All Weather Strategy: Outperformed World equity by 1.9%
• Asia Pacific ex Japan: Best performer
• Bonds: Stayed about flat
• Gold: Down amidst market uncertainty
• US: Western equity and Japan were hit hard

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 September 3rd: Equity 50%, Bonds 15%, Gold 30%, Commodities 5%
• Reduced downside compared to an equity-only strategy

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

• The volatility of All Weather Strategy has been less than 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

US Election day should put an end to uncertainty, but this is 2020

• Election day, November 4, would typically end uncertainty, as the results show who will be running the US for the next four years
• Though this time, it appears that both sides are ready to take various actions not to accept the outcome if they’re on the losing side
• A clear election outcome would be positive for the US market in the short term

Prolonged uncertainty is likely

• We don’t expect it to be that clear and quick, though, and prolonged uncertainty is likely
• This could lead to continued short-term volatility in US equity
• Independent of the winner, we think gov’t and/or Fed stimulus is going to continue
• Though stimulus can prop up the market in the short-term, we think it’s unsustainable

Fed to keep nominal rates low

• We expect the Fed to keep nominal interest rates low to help companies, banks, and government
• Inflation is going to cause negative real interest rates and put downward pressure on the US$ in the longer term, making bonds less attractive

Hold bonds for the diversification benefit

• We’re currently in Thai government bonds
• We expect low rates in the West and a weak economy to keep rates low in Thailand as well
• We hold bonds for the diversification benefit rather than the return potential

China drives Asian recovery

• The COVID-19 pandemic seems to be far from over, as Western countries tighten restrictions again for the next wave
• Many East Asian economies appear to have the virus under more control, which should be positive for the recovery in these markets
• China’s recovery drives demand and could help the region as well
• Target weight is 25% in Asia Pacific ex Japan

Staying conservative in our allocation

• We’re still cautious on equity, especially the US
• A second lockdown beginning in Europe
• Taking a longer perspective, even when COVID-19 is under control, many concerns remain, e.g., geopolitical tensions, mass unemployment, and debt issues
• With 30% in gold and 15% in bonds, we still consider our weights conservative

Regional Equity FVMR Snapshot

• Fundamentals: US has the highest ROE by far
• Valuation: Emerging markets have the lowest PE and Japan lowest PB
• Momentum: Only Developed Europe and Japan are down in the past 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.