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 – Monday
The ASX 200 (ASX:XJO) surrendered early gains to finish Friday down 0.6%, pulling the market down -2.3% for the week. Real estate, -5.4%, and industrial’s, -4.6%, were among the hardest hit as Victoria’s spike in COVID-19 cases shut the second largest state down for another six weeks; Qantas Ltd (ASX:QAN) lead the falls down 8.0%. Despite offering a weaker leader to the ASX, both the S&P 500 and Nasdaq recorded positive results on Friday, driven 1.1% and 0.8% as the recovery in the banking sector continued.
Netflix Inc. (NASDAQ:NFLX) and Tesla Inc. (NASDAQ:TSLA) continued stellar recent runs improving 8.8% and 10.1% on Friday alone. European markets were buoyed by better than expected economic data, with Italian and French industrial production increasing 42% and 20% respectively compared to expectations of just 23% and 15%.
The Eurostoxx bounced 1.1% on the back of the better than expected news, with brewer’s Carlsberg (CPH:CARL-B), 6.4%, and Anheuser Busch InBev (EBR:ABI) benefiting from a quicker than forecast recovery in Asian demand. In my view, European markets offer an interesting risk-reward opportunity as the region finally comes together on monetary and fiscal stimulus.
Entering wonderland
Walt Disney Co (NYSE:DIS) rallied 2.2% after announcing the reopening of two Florida amusement parks, along with various other global facilities; this comes at the same time that the National Basketball Association is preparing to restart its season in the Florida parks ‘bubble’ environment. I remain confident in Disney’s long-term outlook via its combination of value and growth opportunities, including its cruise lines and ESPN sports channels.
The Nasdaq effect mentioned last week has become contagious, with small business accounting platform Xero Ltd (ASX:XRO) hitting an all-time high of over $93 and Afterpay Ltd competitor Zip Money Ltd (ASX:Z1P) improving over 8% to $7.24, a high of its own. In my view, these valuations are becoming dangerous and difficult to fathom, but as usual are being driven by the sheer lack of real growth companies available on the ASX and a continued unwillingness for many self-directed investors to allocate capital offshore, something we covered here.
The incredible eight-day rally in Chinese sharemarkets came to an end with a return of 17%, after a number of state-owned pension funds announced the broad sell down of large shareholdings that had benefited heavily from the rally.
Valuations – looking through the fog
Valuations were a key topic of discussion this week, with many experts questioning the lofty price of technology companies. Of more interest to us, has been the lack of attention paid to residential and commercial property valuations, with little change some three months on from the COVID-19 crash.
Despite listed real estate companies like Unibail-Rodamco-Westfield (ASX:URW) and Scentre Group (ASX:SCG) trading at 50-60% below their 2020 highs, the valuation of the underlying assets of these companies and many of their competitors have barely moved. In fact, it was reported during the week that several union-backed industry funds have actually increased the valuation of their direct property assets.
This seems hopeful given what we are seeing in our CBD’s and recent reports that some 2 in 3 apartments in Melbourne were being sold at a loss in the March quarter. Finally, the UK Government provided a glimpse into the future of fiscal policy, announcing a Value Added Tax (like our GST) reduction for hospitality focused business, something suffering Victorian and Australian businesses are no doubt crying out for.
The daily report is written by Drew Meredith, Financial Adviser and Director of Wattle Partners.
