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
Turnaround…
The ‘Vaccine’ rally was short-lived with a swathe of economic data sending the ASX 200 (ASX:XJO) 0.7% lower on Thursday. The healthcare sector was hardest hit, falling 1.5% as CSL Ltd (ASX:CSL) fell 2.1% without any specific news. Whilst the US-China trade discussions have slowed, geopolitical risk has increased with travel bans applied to both US and Chinese Communist Party officials in growing war of words.
Despite this, the Chinese economy avoided a recession, growing 3.2% in the June quarter, but showing weaker than expected retail sales (-1.8%).
The weaker than expected result saw the Shanghai Composite fall close to 5% in a single session.
Looking globally, both the US and Europe weakened on the escalation, placing pressure on the global economy and outlook for retail stocks; Richement SA (SWX:CFR), which owns Cartier among other brands fell 4.6%. All three US indices closed lower, the S&P 500 down 0.4% and Nasdaq 0.7% with another negative day ahead for the ASX.
Nearing the edge
Australian unemployment data was released, increasing from 7.1% to 7.4%, the highest since 1998. The majority jobs added during the month were part-time, suggesting a gradual recovery was underway, at least until Victorian’s second round of lockdowns.
It’s estimated that unemployment is nearer to 13% when the impacts of Job Keeper are removed, suggesting a tough period ahead for all Australians.
Of greater concern to the Australian economy on Thursday were comments from the Chinese relating to anti-dumping complaints made by Bluescope Steel Ltd (ASX:BSL), suggesting further complaints may see tariffs placed on our iron ore exporters, BHP Group Ltd (ASX:BHP) and Rio Tinto Ltd (ASX:RIO) fell 0.6% and 1.4% respectively.
On the positive side, Seek Ltd (ASX:SEK) reported a 41% increase in job ads, with the majority in the hospitality and trade sectors; in my view SEK’s important role in the recovery and retraining of the economy makes it a solid business.
Look beyond the headlines
Headlines continue to drive daily share price movements, with smaller company Michael Hill Jewellers Ltd (ASX:MHJ) jumping 6.6% after announcing a 193% increase in online sales in 2020. Looking more closely though, online sales made up just 4.6% of their total meaning they had little impact on profitability. With e-commerce the word of the day, investors need to pay close attention to the fine print and look beyond the share price.
US retail sales continued their recovery, improving 7.5% in June, allowing Johnson & Johnson (NYSE:JNJ) to buck the market despite reporting an 11% fall in quarterly sales to $18.34 billion and a 35% drop in profit to $3.63 billion. Australian-led bank Morgan Stanley (NYSE:MS) was one of the few to deliver profit growth on 2019 growing $3.2 billion versus $2.2 billion in the year prior.
Such was the strength that CEO James Gorman suggested the bank could actually increase its dividend if it was legally allowed to. Morgan Stanley appears to be the National Australia Bank Ltd (ASX:NAB) of our Big Four, after Standard and Poor’s rated the company as being best placed to manage a prolonged downturn.
The daily report is written by Drew Meredith, Financial Adviser and Director of Wattle Partners.
