Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Financial Planner morning report Friday
Markets are rudderless
It seems to me that global markets are stuck in a trading pattern, oscillating between euphoria when signs of a vaccine are announced, to despair as new economic results and increasingly protectionist policies are released around the world. Overnight on Thursday, the US market fell another 0.8%, led lower by energy, technology, and utilities, as the new normal kicks in.
The Australian market gyrated, up early only to capitulate in the afternoon amid a broadening trade ‘negotiation’ with China. All 19 sectors fell in Europe, sending the market down 1%. The team at asset manager Janus Henderson are predicting global dividends to fall between 15% and 35% in the next 12 months. The US Government 10-year bond remains fixed at 0.6% after spiking over 1% in March. With rates so low VanEck is predicting the US price of gold could hit previous records of $2,000 in 2021.
Warring without Trump
The Chinese government followed tariffs on Australian barley, which hit GrainCorp, with tighter rules on both meat exports and iron ore announced this week.
The impact has been a slowing rally in Fortescue and BHP Group, despite widespread shutdowns in the sector’s primary competitor, Brazil’s iron ore miners.
In my view, the coverage of this trade spat is overblown and misunderstood, with the Chinese simply ‘renegotiating’ the only way they know how. There is now talk that some Chinese companies could be banned from US stock exchanges, like Alibaba (NYSE: BABA) and Baidu (BIDU), sending shares in both companies down on Thursday. China’s homegrown Starbucks (SBUX), Luckin Coffee (LK) is on the verge of being forcibly delisted after some $310 million in fabricated sales were brought to light.
E, S, or G?
Shares in stockbroker favourite, Aristocrat Leisure, which manufactures poker machines and offers online casino gaming, fell heavily on Thursday after announcing a 7% fall in revenue to $2.25 billion for the six months to March 2020, and a subsequent cut in profit of 14% to $305 million. Despite clear ethical concerns, the company has remained a stalwart of Australian growth portfolios, but this may come into question as the dividend was suspended and online bookings disappointed. If anyone is to lose out of the post-COVID 19 restructure, it would seem to be discretionary gaming businesses.
Another Australian leader, Droneshield (DRO) surged over 60% on Thursday after announcing EU police forces had entered into an agreement to purchase their drone protectors. This looks like validation of a great small business.
As Disney is to movies, Spotify (SPOT) is to podcasts. The company continued its recent buying spree, acquiring Joe Rogan’s entire back catalog for $100 million, the share price is up over 20% in 2020 and looks a long-term buy in our view as consumption habits change.
The daily report is written by Drew Meredith, Financial Adviser and Director of Wattle Partners.
