A. Stotz All Weather Strategy – October 2021

The All Weather Strategy outperformed a traditional 60/40 portfolio in October. Fed/ECB unwillingness to taper could drive equities higher. Commodities driven by the energy crisis and supply-chain disruption. Risks: Inflation turns out transitory, new lockdowns, US default.

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 driven global equity to new highs

Western Developed markets were the main portion of AWS’ equity allocation

• In our June 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 revision

US stock market rebounded in October

• In our previous update, we predicted the US Congress to raise the debt ceiling and that it would lead to a rebound in US equity
• Congress increased the debt limit by US$480bn, and US equity reached new highs and was the best performer in October 2021

Developed Europe was the second-best performer

• European GDP growth for 3Q21 surprised on the upside
• The European Central Bank (ECB) pushed the decision about ending its pandemic-related QE to the December 2021 meeting
• Countries have continued to open up
• European stocks continued to perform well

Emerging markets and Asia Pacific ex Japan underperformed Western markets

• Many countries still have had restricted economic activities due to lockdowns
• Chinese government intervention in various Tech businesses has kept up uncertainty around investing in China
• Evergrande issues have led to questioning of China’s overall property sector
• China constitutes a large part of Emerging Markets and Asia Pacific ex Japan

Low bond target allocation at 5%

• We have a bond target allocation of 5% 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
• Besides Japan equity, other assets were up in October; hence, the low 5% allocation to bonds was a good decision

Energy continued to drive commodities

Gold was up in October

• We have a minimum 5% allocation to gold
• October was volatile, where investors first worried about inflation and the gold price traded above US$1,800/oz t
• Though, Fed’s stated commitment to reduce the support of the US economy led the gold price to fall back by the end of the month
• Gold closed the month at US$1,783/oz t

October 2021: AWS outperformed a 60/40 portfolio by 0.5%

• US: Best performer, rebounded from being the worst in September
• Dev. Europe: Second-best performer
• Commodities: Fourth-best performer

Since inception: AWS has outperformed a traditional 60/40 portfolio

• The All Weather Strategy has mostly had a 45-65% equity target weight and a 25% gold allocation
• Since March 2nd: Equity 65%, Bonds 5%, Gold 5%, Commodities 25%
• Reduced downside compared to an equity-only strategy

Since inception: AWS has had lower volatility than a 60/40 portfolio

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

Since inception: Lost less than 60/40 on 8 out of the 10 worst-returning days of world equity

• 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

Since inception: AWS has outperformed a 60/40 portfolio in 63% of months

• In 20 out of 32 months, the All Weather Strategy has beaten a traditional 60/40 portfolio

Outlook

Fed may reduce its assets purchases but not stop and start selling this year

• “I do think it’s time to taper; I don’t think it’s time to raise rates,” said Powell on October 22
• Chairman Powell confirmed our expectation that Fed may reduce its asset purchasing this year, but won’t bring on rising interest rates

US Congress is likely to avoid default again

• The US$480bn higher US debt limit should keep the Federal government funded at least until mid-December
• When the current limit is reached, we expect to see a further lift of the debt ceiling to not negatively affect the fragile economic cycle

The market expects Fed to hike rates in June 2022

• US Gov’ts high debt load is also likely to keep Fed from raising rates too fast or by too much
• The market is now pricing in a 70% chance of a rate hike in June 2022; previously it only priced in a 50% probability of a rate hike in September 2022
• We expect the Fed to continue doing what it can to prop up the US market

European momentum to continue

• ECB President Lagarde, like Fed Chair Powell, echoes the “inflation is transitory” narrative
• Lagarde said to stop the Pandemic Emergency Purchase Programme (PEPP) by March 2022, but other QE may continue
• Yet no tapering decision, removed COVID restrictions, and inflation should be positive for Developed Europe equity

China remains uncertain

• Emerging markets and Asia still have many countries with remaining COVID restrictions
• Investors are concerned about continued Chinese gov’t clampdowns and the health of the Chinese Real Estate sector
• Continued uncertainty is negative for China equity, and its heavy weight in the Emerging markets and Asia Pacific ex Japan indices is likely to drag on performance

Bonds to remain weak

• As we’re expecting rising inflation, we expect bonds to underperform
• This is reflected in our 5% target allocation

Energy crisis drives commodities

• Imminent global supply-demand imbalance could drive energy prices further
• Poor weather conditions hurt the supply of key agricultural commodities

Supply-chain disruption continues to push up prices

• Expect continued economic recovery in the West and China to support commodities
• Global supply-chain disruption due to government-mandated economic shutdowns could become more permanent

Still no catalyst for gold

• In the longer term, as the inflation narrative spreads, it could lead to expectations of negative real rates
  • Supportive of the gold price
• We don’t expect Fed and ECB to make any surprising statements, so we don’t see their communication pushing gold in either direction

Regional Equity FVMR Snapshot

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

Risks

Inflation turns out transitory

• The All Weather Strategy is positioned to benefit from rising inflation
• There’s a risk that inflation is transitory, which could hurt our performance
• Besides, return expectations in inflationary environments are based upon corresponding rising interest rates
• But the Fed and ECB are expected to keep rates low at least until late 2022

New variants of the coronavirus lead to new lockdowns

• If governments in countries with high vaccination rates return to lockdowns to battle new mutations of the virus, it would be negative for those equity markets

US default

• While the American Congress has bought more time by raising the debt ceiling, it may need to deal with it again as soon as December
• If the US defaults, this could have serious negative consequences for US equity, and possible global equities 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.