Wanted: portfolio for inflation, stagflation and contagion

  • The TAA portfolio has grown 7.7% since January
  • Performance improvement after August rebalance

Going forward but not turning off the lights would be a good way to summarize the performance of the Tactical Asset Allocation (TAA) portfolio. Since the last rebalancing in early August, the total return has been 3.1%, about half of what an S&P 500 US equity tracker did to UK investors.

Since the start of the year, the TAA has climbed 7.7%, while the US benchmark is up a fifth. A fairer comparator is the MSCI PIMFA Asset Allocation Index, which has a similar weighting to stocks like TAA and comes out roughly similar with total returns of 7.4 percent (01/08/2021 to 10/29/2021 ), although the PIMFA index would be cheaper to replicate.

Earlier this year, TAA was caught up by the rally in value and the rise in UK stocks in particular. Since August, however, it has outperformed the PIMFA Balanced Index. The tough call wasn’t so much to pick the markets and themes that will do well with the reopening of the global economy, it has chosen the right time.

Fair enough, the whole point of tactical asset allocation is to make winning calls and TAA got it wrong in January, but the lifeline for the portfolio is the principles of strategic asset allocation which underpin it. This will remain crucial going forward as there are a host of uncertainties facing investors as we approach next year.

Covid-19 has not gone away and even if further blockages are avoided, the fallout from the pandemic in terms of labor shortages and supply chain disruption continues to wreak havoc. In energy markets, too, stop-start demand affected production, which, combined with the usual geopolitical shenanigans, led to price spikes and consumer dismay.

Monetary tightening is approaching

Such upward pressures on the cost of living and doing business have made inflation a hot topic of debate among central bankers. Hawkish voices in monetary policy committees are growing louder, calling for cuts in bond buying programs (quantitative easing) and the way forward to raise interest rates.

The stock markets have become so addicted to central bank stimulus (really since the 2008-09 financial crisis) that, perversely, bad news in the real economy was seen as good news because it meant that central banks would keep the money taps loose. Now that the bad news is arriving in the form of inflation, however, the actions policymakers may need to take will be less conducive to a rise in stock prices.

Governments are expected to take more pressure to stimulate economic recovery and fiscal policy (fiscal and spending plans) is crucial, with monetary policy having less room for maneuver. This is not helped by a feverish political environment in the United States, where President Biden’s spending plans are hotly debated in Congress.

In the European Union, it is understandably difficult to agree on how much each member state should spend and the amount of wealth to be transferred between countries to support the monetary policy efforts of the European Central Bank (ECB ).

China is the cause of much anxiety, thanks to the unknown potential of the contagion effect of the Evergrande real estate scandal. The national economy of the Middle Empire is heavily focused on the real estate sector, and the intricacies of its internal debt markets, shadow banking, and financial system are poorly understood risks.

The ripple effect of a collapse in demand for Chinese real estate is manifested in the shares of mining companies that supply raw materials. Confusingly, different commodity narratives disagree. On the one hand, there are fears for demand in the world’s largest economy (in purchasing power parity); and on the other hand, the need for a global transition to more renewable energies is a bullish factor for many metals.

Paradoxical dilemmas are a feature of energy. Oil above $ 80 a barrel means money for giant producers, but volatile demand and supply dynamics and age-old headwinds for fossil fuels make it a difficult investment to time. Commodity prices can be a hedge against inflation, but they are still subject to shocks and therefore are not straightforward or straightforward.

Hope in actions?

Still, there is reason to be optimistic. Challenges equal opportunities for dynamic companies in the fields of clean energy, health and information technology; leading companies will generously reward their shareholders. To go further, the revolutions in communication, capital management and supply chain controls (current problems will only give impetus to the search for solutions) promised by blockchain innovations are already here. referred to as the fourth industrial revolution.

TAA has a thematic focus, which is due to the belief that market-capitalization-weighted country indices, particularly the S&P 500, have been somewhat inflated by the simple trade of buying companies with good earnings quality returned. more attractive by ultra-low interest rates. That may be about to change, thanks to the potential rate hike and also, in the case of the S&P 500, because some of the larger companies could face disruption (and at the very least pressure. on prices) due to the new wave of technologies and competitors. .

Web 2.0 oligarchs such as Facebook founder Mark Zuckerberg are clearly aware of the opportunities of Web 3.0. Renaming the company Meta (a nod to the metaverse, which is the internet part of shared virtual reality) and also engaging in projects such as Diem (Zuckerberg’s second attempt at a tokenized digital currency) is bold but may not be enough. A centralized data company controlling the Internet will hardly allay antitrust concerns, and in any case it runs counter to the principles of a decentralized, democratized and transparent (but secure) Web envisioned by blockchains such as Cardano, Internet Computer. and Solana.

Keeping TAA’s stake in the S&P 500 means the portfolio has a boot in the big tech camp if negative assumptions are wrong, and it also means supporting other big companies if they start doing relatively better. Active participation in Allianz Technology Trust (ATT) is because the TAA is still bullish on the US and technology, but shifts that confidence more towards innovative companies in the $ 10 billion to $ 100 billion range.

Asian Pivot

An active bet is also taken towards Asia with Schroder Asian Total Yield (ATR). The Communist Party in China does not have a truck with tech companies with centralized ownership of payments and information data, let alone currency units. The recent crackdown and progress towards a digital renminbi (the Chinese currency) demonstrates that the Party wants an exclusive monopoly on powerful instruments of control.

Aside from concerns about Evergrande’s financial contagion, the draconian (although understandable in some ways) stance towards its larger companies means that the management of exposure to China is reassuring. The weighting to mainland China and Hong Kong combined represents just over one-fifth of the ATR portfolio (China represents one-third of the MSCI Emerging Markets Index), and the fund has a significant weighting to India, l ‘Indonesia and Vietnam, a sign of discernment in action and an appreciation of the ebbs and flows in the different growth stories of Asia.

The growing assertion of China vis-à-vis Taiwan is a risk for ATR’s holdings but also for the Asia-Pacific region in general. Japan has made steps towards strategic alliances with Taiwan in a show of determination to resist Chinese domination. More generally, TAA’s participation in Japan could benefit from the performance of the Liberal Democratic Party (LDP) of new Prime Minister Fumio Kishida, better than expected in the last elections. This increases the likelihood of economic stimulus.

Closer to home, there is little incentive to adjust positions in UK or Eurozone equities. The FTSE 100 Index provides good exposure from home listed companies to oil, gas and mining companies. Whether this is a reasonable covered position towards energy transition or not depends in part on ideology. Miners will certainly be needed in the electrification race, and while they can do more, UK-listed energy majors are ahead of their US counterparts in green accreditation.

The main question for UK mid caps could be to what extent the potential for reopening has already been built in. reinforcement. The euro zone’s position is also to position itself for a recovery across the Channel.

Fixed income positions were reduced after the last TAA rebalance and there is no desire to gamble on what is an extremely tricky yield curve. Longer-term indexed gilts have been roughly flat, although they are vulnerable to rising interest rates. So far, the shorter-dated gilt fund has suffered more from market nervousness. Inflation is the fear, but rate hikes should be short lived. In other words, investors seem to reserve judgment on the sustainability of a firm policy response.

TAA Portfolio November 2021
Asset class While carrying % TR (04.08.2021 to 29.10.2021) Current weight
UK Large Cap Equities iShares Core FTSE 100 (ISF) 2.7 5.00
UK Mid-Cap Equities Avant-garde FTSE 250 (VMID) -0.4 4.60
Eurozone actions x Euro Stoxx 50 trackers (XESC) 2.1 5.20
US Large Cap Equities Vanguard S&P 500 (VUSA) 6.2 8.40
Japan stocks iShares MSCI Japan IMI (IJPA) 2.4 4.60
Listed infrastructures M&G Global Listed Infrastructure Acc GBP 2.6 7.70
Global Equities IShares Automation and Robotics (RBOT) 4.2 5.10
Global Equities Impax Environmental Markets (IEM) 7.9 5.50
Global Equities Biotech Growth Trust (BIOG) -3.5 3.40
Asia equities (excluding Japan) Schroder Asian Total Return (ATR) -1.2 6.80
Global Equities L&G Battery Value Chain (BATT) 1.6 4.90
Global Equities Allianz Technology Trust (ATT) 8.7 5.10
British gilts Lyxor UK Gov Bond 0-5 years (GIL5) -1.3 4.60
British gilts linked to inflation iShares GBP Index-Linked Gilts (INXG) -0.6 5.00
Emerging bonds (USD) iShares JP Morgan USD EM Bond (EMHG) -1.5 5.00
British and European private equity Augmentum Fintech PLC -3.6 5.50
Intl. DM real estate HSBC FTSE EPRA / Nareit Developed (HPRO) 3.3 5.70
Gold Invesco Physical Gold ETC (SGLD) -0.2 4.40
Bitcoin 58.7 3.50
Total (since 04.08.2021) 3.1
TAA since 08.01.2021) 7.7
Source: FactSet and Investors’ Chronicle

Source link

About Rochelle Boisvert

Check Also

Broken supply chains threaten ruin at a growing number of small firms, Auto News, ET Auto

One bright side of the distressed drought is that traders who focus on struggling businesses …