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 – Wednesday
Market fragility
In a sign of how fragile this market recovery may be, global markets swung between gains and losses of 1% after White House Trade Adviser Peter Navarro initially suggested the trade deal with China was ‘over’. This was only to be retracted by President Trump minutes later via Twitter.
The result was most global markets finishing strongly for the day, the ASX 200 (ASX:XJO) up 0.2%, the S&P 500, 0.5% and the Nasdaq 0.7%. European markets recovered strongly, the FTSE 100 gaining 1.2% and Eurostoxx 1.8% after Manufacturing and Services PMI’s printed much higher at 46.9 and 47.3 increasing hopes for a V-shaped, central bank supported recovery.
The ‘trade deal’ tantrum did little to remove the feeling that this spectacular rally has become more speculative as long as it continues and that now is not the time to be chasing cyclical, higher risk companies hoping for a recovery; particularly if Victoria’s shutdowns continue to spread.
Transformation
A number of my preferred Australian companies reported business changing news on Tuesday, starting with Qube Holdings Ltd (ASX:QUB). QUB is an integrated port and logistics provider who also own the Moorebank Intermodal Terminal in NSW. Management announced that they had secured a major tenant for the automated warehouses that are expected to transform the company.
That tenant, was Woolworths Ltd (ASX:WOW). With construction due in 2023 and subject to an initial 20 year lease, WOW clearly sees the opportunity in automating their supply chain and drastically reducing their distribution costs.
It’s expected to benefit QUB in the range of $1 billion with the additional bonus that WOW’s major suppliers will likely seek additional space in the terminal. QUB’s share price moved 7.8% higher for the day. WOW also provided an update on its operations, writing off a further $591 million partially due to staff underpayments and COVID-19 related costs whilst reporting strong growth in food sales, 8.6%, Big W, 27.8% and Endeavour Drinks 21.4%.
Deals getting gone
Long-time under-performer AMP Ltd (ASX:AMP) moved 7.9% after announcing the sale of its AMP Life business had been approved by the New Zealand authorities, ensuring its digital transformation continues. This was welcome news after Australia reported imports fell 18% in May on 2019 and exports a similar 13% drop.
The economy remains remain as exposed as ever to China, with exports increasing 7% for the month driven by a 79% increase in coal by the likes of BHP Group Ltd (ASX:BHP) as energy demand ramped up once again. Vintage and homemade goods selling platform Etsy Inc. (NASDAQ:ETSY) rallied close to 8% as it remains one of the few remaining e-commerce platforms that hasn’t benefited from the rally.
In what may be a sign of the recovery expanding into home building in the US, little known flooring company Mohawk Industries Inc. (SPX:MHK) added 13%, with James Hardie (ASX:JHX) and Boral Ltd (BLD) to similar opportunities in Australia.
The daily report is written by Drew Meredith, Financial Adviser and Director of Wattle Partners.
