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 – Tuesday
Narrowing the loss
The ASX 200 finished a sixth straight week in positive territory, adding 4.2%, but gaining just 0.1% on Friday. The story was similar overseas, with the Nasdaq hitting a record intra-day high on Friday before blasting through it completely on Monday. The S&P added 2.7% on Friday and a further 1.2% Monday to erase all losses for 2020.
The rally was broad based and triggered by a far better than expected US unemployment result, with the economy adding 2.5 million jobs and the overall level falling to 13.3% from 14.7%. All 78 economists surveyed by Bloomberg had predicted further job losses with many commentators suggesting this is the biggest miss ever by economists.
The airline sector remains a key beneficiary of a reopening economy with Boeing Co (NYSE:BA) up 11% and Qantas Ltd (ASX:QAN) 3%. On the other hand, a more positive outlook is placing pressure on the healthcare sector with CSL Ltd (ASX:CSL) and Fisher & Paykel Healthcare Ltd (ASX:FPH) both off 3%.
Enter the new world
In a sign the world is changing in front of our eyes online retailer Kogan Ltd (ASX:KGN) announced a 100% increase in sales in both April and May sending the company’s shares to record highs. At a market cap of over $1 billion it’s now worth four times as much as Myer Holdings Ltd (ASX:MYR), yet I still struggle to see KGN becoming Australia’s Amazon Inc. (NASDAQ:AMZN).
The spoils haven’t been evenly shared with billions in market capitalisation shifting from traditional value sectors including energy, resources and financials into technology and consumer-facing businesses. Many leading investors have been caught out once again after being unprepared for the initial volatility Stanley Druckenmiller has suggested he was ‘far too cautious’ in his outlook for the recovery.
Positive leads around the world
More positive news emerged over the long weekend with OPEC+ extended supply cuts for a further month and calling out those nations who refused to cut as agreed, being Iraq and Nigeria. AstraZeneca plc (LON:AZN) is said to have approached Gilead Sciences (NASDAQ:GILD) to discuss the biggest pharmaceutical merger in history.
The AUD is likely to continue its recent run as Brazil becomes the epi-centre of new COVID-19 cases, keeping iron ore prices above $100 per tonne; but is substantially overvalued in my view. Particularly in light of growing concerns around Australia’s relationship with China following a recent travel warning issued by the Communist Party.
The ASX 200 (ASX:XJO) will head higher Tuesday with the energy and travel sectors likely key beneficiaries, expect Webjet (ASX:WEB) to extend recent gains.
The daily report is written by Drew Meredith, Financial Adviser and Director of Wattle Partners.
