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
Holding out hope
The ASX 200 joined the global sharemarket rally, adding 1.9%, after healthcare US biotech company Moderna Inc. (NASDAQ:MRNA) announced positive results from their Phase 1 trial of a potential COVID-19 treatment.
Markets reacted swiftly sending the stock up 4.5% and some 400% for 2020, despite the likes of Hamish Douglass of Magellan Financial Group Ltd (ASX:MFG) suggesting even if a vaccine is actually found, and there is no guarantee, than the sheer logistics of distributing the treatment would be immense.
Once again, the mining sector lead markets higher, with BHP Group Ltd (ASX:BHP) and Rio Tinto Ltd (ASX:RIO) adding 2.5% and 3.7% as imports of iron ore by the Chinese increased 35% in June from 2019 and 17% from May. The S&P 500 moved above a month high, gaining 0.9% with cyclical companies like Royal Caribbean Cruises Ltd (NYSE:RCL) and American Airlines Group Inc. (NASDAQ:AAL) up 21% and 16% respectively driven primarily by hope.
The Eurostoxx similarly added 1.8%, with drug maker Astra Zeneca (NYSE:AZN) jumping 5% ahead of its own report. It’s clear these rallies are driven by emotion and fear rather than underlying fundamentals, making them as dangerous as ever for inexperienced traders.
Lower for longer
The Bank of Japan held their monthly meeting, with a steady as she goes approach, the cash rate maintained at -0.1%, the bank guaranteeing continued support through market purchases and ultimately a downgrade in GDP expectations to a contraction of between 4.5% and 5.7%.
This came with one major caveat, it assumed that no second wave impacts the economy. The Nikkei 225 reacted positively to the news, up 1.6%, with the all-important car exports companies including Nissan Motor Co Ltd (TYO:7201) up 7.2% on hopes of a China-led export recovery.
Low interest rates don’t seem to be helping struggling developer Lend Lease Group (ASX:LLC) who have reportedly cancelled the sale of two shopping malls they were hoping to move to fund some $1.3 billion in redemption’s. It’s a tough environment for property owners and I continue to expect extensive devaluations before 2020 is out; hence I continue to avoid the sector.
Following the recent lead of Woodside and Oil Search, Origin Energy Ltd (ASX:ORG) announced a $1.2 billion write-down of their oil and gas assets, halving expected earnings for the year.
The new economy
Apple Inc. (NASDAQ:AAPL) rallied strongly, up 0.7%, after the European General Court ruled that the European Commission’s demand for some EUR$13 billion in ‘undue tax advantages’ were legal; a positive for both Apple and Ireland.
The company remains one of the top performers in 2020, in fact it is among a small group of companies that have contributed to almost 60% of the 2020 rally, centred around software, media and healthcare companies or the so-called ‘new economy’.
Key beneficiaries of the strategy highlighted in the AFR today have been the Franklin Global Growth Fund and GQG Global Equity Fund, both among the top 20 performers.
Afterpay’s ‘little brother’ Zip Co Ltd (ASX:Z1P) offered a quarterly update to investors, announcing recorded quarterly revenue of $46.4 million, a 72% increase, and 91% for the year to $161 million; with bad debts hitting just 2.2% Z1P offers a less eye watering valuation than its big brother.
Finally, investment bank Goldman Sachs posted a 93% increase in revenue in its trading and capital markets business, beating all estimates, which bodes well for Macquarie Group Ltd (ASX:MQG).
The daily report is written by Drew Meredith, Financial Adviser and Director of Wattle Partners.
