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’s morning report – Friday
Taking a breather
The S&P 500 broke three straight days of gains, falling 0.2% as investors seemingly became exhausted from an extended rally. This despite unemployment benefits slowing and announced recoveries in domestic flights. Earlier the ASX 200 gained 0.8% and is now nearing the 6,000 level on the back of a sustained rally in the banking sector; the index is now pushing towards its 6th consecutive weekly rise.
To me, it is clear that markets are, and will remain supported by the cheap flow of capital coming from global central banks (another $500 billion from the ECB overnight), triggering a fear of missing out reaction from those who exited during March. In my view, the biggest risks to this sustained recovery are an unexpected second wave of COVID-19, with current protests threatening a large spike in cases, or an increase in political risk as the US election nears. In the meantime, investors best remain selective and enjoy the ride.
Cheap quality
CSL (ASX:CSL), rallied 3.8% on Thursday after Paterson’s Securities upgraded their view, suggesting the 10% fall this week represents a unique opportunity for investors to access a true global leader; being long-term holders of CSL, I couldn’t agree more. The Commonwealth Bank of Australia Ltd (ASX:CBA), lead banks higher, +2.3%, yet the question of governance remains after Westpac Banking Corporation (ASX:WBC) blamed human error and technology issues for its 23 million AUSTRAC breaches.
In what may be a sign of cracks in the development sector, a well-known commercial property developer announced he had cut rents by 50% to fill a new office building, likely sending valuations in the entire region down. This is the problem with property in the current environment, if one landlord decides to reduce their rent, all tenants will seek discounts and valuations will suffer. On a separate note, retail sales disappeared in April, falling 17.7%, driven lower by falls in clothing (-56%), footwear (-50%) and restaurants (-53%).
Can we fix it?
Prime Minister Scott Morrison announced his Homebuilder Package, offering $25,000 cash grants for middle income earnings willing to renovate for at least $150,000 in total. This appears to be a stop gap solution, with the Government appearing to support the building sector without committing too much funding. The lower than expected stimulus send Boral Ltd (ASX:BLD) and AdBri (ASX:ABC) lower.
The top performer for the day was small-cap automated ‘bricklayer’ Fast Brick Robotics Ltd (ASX:FBR). The company bounced 110% after announcing its automated Hadrian AI machine was laying bricks at a commercial rate of 200 per hour. In a stunning turnaround we flagged to clients in mid-March, the AUD has approached 70 US cents this week, driven primarily by the losses of others, particularly Brazil, as skyrocketing COVID-19 deaths resulted in a spike in iron ore prices. This is not great news for our own recovery, with the RBA likely to intervene in the coming months should the strength continue.
The daily report is written by Drew Meredith, Financial Adviser and Director of Wattle Partners.
