WHAT IS OUR CURRENT ASSET ALLOCATION & WHY?

In our previous series of newsletters, we have mentioned about the different types of companies to invest in and our preferences in the current climate. We also have a position regarding our asset allocation, and we’d like to share why.

Our current allocation is made up of 35% equities – and the cash portfolio has achieved profits of 14%1 YTD while the MSCI ACWI rose 0.2%.

The cash portfolio is representative of our portfolios’ exposure to equities (except SRS)

Why don’t we allocate more towards equities?

This is due to a divergence that we see between the economy and the stock market, and it is possible that the stock market could snap back to the ugly reality of the economy and turn south again, causing the prices of the equities to drop.

The stock market is supposed to reflect the economy and businesses that make it up, but not only do we see the economy struggling, there are also resurgences in COVID-19 cases with countries re-opening.

The stock market and the economy appeared to have had a quarrel and are not speaking to each other right now – the economy is in the doldrums while the stock market hums along blithely. We do not know who will win the quarrel – thus we think it’s only prudent to be invested as much as possible only into the strong structural growth companies, with a 35% exposure (of the portfolio) and keep the rest as ammunition should the stock market snap.

How badly are businesses and jobs affected?

Many economies around the world have suffered badly from the lockdowns necessary to contain the spread of COVID-19. According to the International Labour Organization, “more than 436 million enterprises face high risks of serious disruption (worldwide). These enterprises are operating in the hardest-hit economic sectors, including some 232 million in wholesale and retail, 111 million in manufacturing, 51 million in accommodation and food services, and 42 million in real estate and other business activities.

And as job losses escalate, nearly half of global workforce (are) at risk of losing livelihoods, (that is), almost 1.6 billion informal economy workers. This is due to lockdown measures and/or because they work in the hardest-hit sectors.”

As well-known businesses such as Virgin Australia and Hertz went bankrupt in the midst of lockdown, the International Monetary Fund cut its global economic forecast again in Jun to -4.9% for 20202 instead of -3.3% predicted in March.

US, as the largest economy, suffered a record high unemployment rate of 14.7% in April before easing to 13.3% in May3. As lockdown eased, employment rose sharply in leisure and hospitality, construction, education and health services, and retail trade3. That still left 13.55 million people unemployed, as reported by Statista for August.

Where are the headwinds?

Many countries are experiencing resurgences in the midst of re-opening, and coronavirus deaths have just passed one million worldwide4. Re-openings or moving to the next phases potentially raises the probability of infections, and the number of deaths. Economies have taken a punch in the gut and some like Japan, South Korea and Germany that had re-opened earlier have had to

Source: OECD (2020), “OECD Economic Outlook, Interim Report September 2020”, OECD Economic Outlook: Statistics and Projections (database).

lock down a 2nd time or reinstitute other measures to contain the coronavirus5.

The Organization for Economic Cooperation and Development (OECD), known for giving us the composite leading indicator (CLI) designed to provide early signals of turning points in business cycles and the Better Life Index,  had revised their projections in September to show a slightly better outcome compared to June’s. June had projected a double dip scenario. However, we are not out of the woods yet as there is a projected downside scenario should the current situation in numerous countries turn for the worse (see above graphic).

So what’s sustaining the stock market?

To counter such an economy-killing move with lockdowns and restrictions after restrictions, many global “central banks cut interest rates and launched huge quantitative-easing schemes (creating money to buy bonds) to keep the economy from sputtering. The European Central Bank is promising more or less to buy everything that governments might issue, (and five days later) on 23rd March, America’s Federal Reserve (Fed) promised to buy unlimited quantities of Treasury bonds and agency mortgage-backed securities, if necessary, and even announced new programmes to support the flow of credit to companies and consumers6.”

And upon the news of unlimited quantitative easing by the Fed, the stock market rebounded. These are the lines of CREDIT that are maintaining the stock market even though the economy and businesses are suffering.

Would the lines of credit be large enough to keep the stock market up? And how long more before the credit is spent? Could the money-printing keep up and keep going?

What’s ahead?

The stock market could show signs of age again, and quickly, once the façade wears off. The Capital Preservation instruments are within your portfolio for the opportunity to buy in should the market turn south again. The portfolio is currently also well-positioned and sufficiently invested at this time with the recent investment call into the newly recommended Phillip Global Rising Yield Innovators Fund which are made up of companies with strong structural growth in mainly the tech and healthcare sectors; as well as a favourable long-term view on China. Do speak to your Unicorn consultant if you would like to know more or have further queries.

Note: We had increased the frequency of our communication with you during the current turbulent times. We will continue to communicate monthly with you during usual times.

Sources:
1.iFast, estimated results may vary depending on when the changes are implemented by clients. Results are net of fees.
2.MarketWatch
3.U.S. Bureau of Labor Statistics
4.CNN
5.McKinsey
6.The Economist

 

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