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 – Wednesday
Seventh heaven….
The ASX 200 (ASX:XJO) delivered a sixth straight day of gains, taking the run to over 6%, as it finished up 2.4% on Tuesday following the public holiday in Victoria.
Some experts have suggested it is a short squeeze with the likes of National Australia Bank Ltd (ASX:NAB) and ANZ Banking Group Ltd (ASX:ANZ), both up over 5%. As has been the case during the rally, the cyclical sectors of energy, financials and consumer/travel businesses rallied the hardest, with healthcare and technology feeling the brunt of the so-called rotation to value.
Wesfarmers Ltd (ASX:WES), provided an update on sales at its ubiquitous Bunnings and Officeworks store network, neither of which closed during the COVID-19 shutdown, with the former seeing sales increase 19.2% and the latter 27.8%. The company has solidified its position as a core long-term holding for portfolios post the outbreak but we are stilling waiting on some idea on expected acquisitions before making a conviction call.
The party stopped
Overnight it looks like this incredibly rally may be coming to an end, as investors become wary of inflated valuations with an outlook for contraction earnings.
The S&P 500 (SPX:IND) fell 0.8% overnight and The Dow Jones (INDU:IND) 1.1% as consolidation and profit taking swept the markets. It was a similar story in Europe with the Euro Stoxx (SX5E:IND) and FTSE 100 (UKX:IND) falling 1.4% and 2.% respectively.
The global technology remains a key beneficiary of the rally, with the Nasdaq hitting another record high, as Apple Inc. (AAPL:NASDAQ) added 3.1% after announcing it will be utilising its own chips in future MacBook models. Closer to home accounting disrupter Xero Limited (ASX:XRO) dropped 6% on expectations is core smaller business market may be hit hardest and take longer to recover.
Cost cutting and revaluations
A simple google of the words ‘ASX‘ and ‘cost-cutting‘ results in hundreds of updates on our listed companies, each of which will be seeking to reduce costs and staff numbers in an effort to sustain profits post-COVID-19. Is this likely to be the biggest trend of the recovery, a resetting of costs as companies take the opportunity to remove ‘fat’ and operating margins?
Take for instance Qantas Ltd (ASX:QAN) which is expected to cut its costs from $4.2 billion to just $2.0 billion in 2021 as it seeks to remain profitable in this new normal. Apply this policy to the banking and retail sectors as business embrace technology and e-commerce wholeheartedly and it becomes clear that unemployment may be a risk.
On this, G8 Education (ASX:GEM) managed to rally another 8% on Tuesday despite the Federal Government removing Job Keeper payments and cutting free child care for the masses.
GPT Group (ASX:GPT) downgraded the value of its High Point Shopping Centre by 13.6%, as rent payments remain in arrears whilst Charter Hall (ASX:CHC) has been one of the few companies on the front foot, acquiring a NSW logistics property for $115 million.
Income starved investors looking for yield in property assets need to be selective and our preference would be more of the latter not the former with more pain to come.
The daily report is written by Drew Meredith, Financial Adviser and Director of Wattle Partners.
