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 – Thursday
A mixed day ahead, some green shoots and hoarding begins again
The ASX 200 finished 1.5% lower following a spike in COVID-19 cases in Melbourne resulting in an extended six-week lockdown. The weakness was exacerbated by record numbers in the US, where a daily record of 60,000 cases was hit.
Every sector in the ASX fell, in fact just 28 stocks added positive returns, except consumer staples with Woolworths Ltd (ASX:WOW) adding 1.1%. Telstra Corporation Ltd (ASX:TLS) also continued its strong recent run, adding 0.6%, with investors seemingly appreciating it’s important and ongoing role in a lockdown environment.
US markets recovered once again, the S&P 500 improving 0.8% and the Nasdaq 1.4%, with Twitter (NASDAQ:TWTR) a standout jumping 7% after announcing a subscription platform and betting from the potential banning of Tik Tok in the US over the Chinese trade spat.
The FTSE100 and Eurostoxx 50 both fell, hit by HSBC, falling 3%, as the US announced an effort to ramp up pressure on Chinese controlled currency regime.
Another holiday?
The Australian Banking Association announced that each of the major banks would be extended the current six-month mortgage repayment holdings, used by some 800 thousand families, a further four months into 2021. Whilst an important step for those people struggling in this difficult environment, it is ultimately delaying the inevitable rise in mortgage defaults.
In my view, the banking sector is more challenged than ever, with return on equity falling into single digits, price-to-book ratios unlikely to recover and record low bad debts part of history.
The result, as we have already seen, is a rebasing of dividends at lower levels, the need for more capital to invest into technology and likely weaker than historic returns. ANZ Banking Group Ltd (ASX:ANZ) and National Australia Bank Ltd (ASX:NAB) were both down 2%.
Australia’s mining sector continues to lead the way, benefiting from a weaker currency and interrupted supply, the latest result being gold miner Northern Star Resources Ltd (ASX:NST) reinstating its dividend despite reporting production below expectations; the stock was up 6.5%.
Going green
On the more positive side, two US solar companies agreed to merge, with Sunrun (NYSE:SUN) acquiring Vivint (NYSE:VVNT) for $3.2 billion in an all equity deal. The consolidation was a positive result for both companies, up 22% and 38% respectively, in what is an incredibly competitive and low margin sector.
Electrolux (STO:ELUX-B) owners of Westinghouse and Kelvinator, adding 1% in Europe after reporting 3% growth in June sales compared to 2019 and successful cost cutting strategies.
Once again, Solomon Lew’s Premier Investments Ltd (ASX:PMV) is on the front foot, announcing all metropolitan stores would close and that he would no longer be paying rent, placing further pressure on the likes of Scentre Group Ltd (ASX:SCG), which we raised yesterday.
Despite a recent run of volatility, it seems the days of markets moving up or down 5% may be gone for the time being, the same can’t be said for individual investors. Stay safe and invest carefully.
The daily report is written by Drew Meredith, Financial Adviser and Director of Wattle Partners.
