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
Here’s what financial planners need to know Friday morning.
Data continues to worsen
The ASX 200 followed Wall Street’s lead down on Thursday, falling 1.7% and finishing at just 5.319 points. The first of Australia’s weak economic data was released showing unemployment had spiked to 6.2% from 5.2%, with some 600,000 people losing their jobs in the quarter.
Unfortunately, a falling participation rate and the Job Keeper payment is hiding the likely closer to 11% unemployment figure based on the views of most economists.
The news wasn’t much better in the US after another 2.98 million people claimed unemployment benefits in the week prior. Even amid this negative backdrop the S&P 500 managed to break three consecutive down days to improve 1.2% at the close as the likes of McDonald’s (NYSE: MCD) rolled out their phased reopening handbooks.
The beginning of MMT
In signs that the increasingly popular Modern Monetary Theory or MMT policy may be suited to this difficult environment, the Australian Government easily managed to sell $38 billion worth of 10.5-year bonds on Thursday.
Increasing rhetoric from China regarding our trade relationship, including the banning of certain meat exports this week, is placing diplomatic stress at a time when our exports are as valuable as ever (of which 33% go to China). There is little doubt that the economy will need as much support as it can get for as long as possible to stave of depression-era unemployment conditions.
It’s all about tech
Proof that the resilience of technology companies do in fact travel came as China’s tech heavyweight Tencent (HK: 0700) provided its quarterly update. The company, which owns the Fortnite video game franchise, Weixin Pay, the largest online payment processor in China; and more recently 5% of Afterpay (ASX: APT), beat expectations.
Tencent’s gaming sales improved 31% as the world was stuck at home, offsetting weakness in advertising revenue, with total revenue up 26% to $15.2 billion for the quarter.
Back home and Amcor (ASX: AMC) announced they expect earnings per share growth to improve for the financial year, benefitting from the defensive attributes of packaging the most hoarded products. However, management suggested weaker results in FY20-21 as consumption slows.
The biggest surprise for me came from Graincorp (ASX: GNC), which reported a $388 million profit following the demerger of its United Malts (UMG) business, getting growth from all business units. Interestingly, the latter business launched an unexpected equity capital raising just a few months after becoming its own business.
This report was written by Drew Meredith, Financial Adviser and Director of Wattle Partners.
