The effects of the trade war continues to drag on the economies of the world and while a recession is averted as of now, analysts are warning of a sharp market correction if the situation does not improve. Many governments have been looking at simulating their economies again either with a combination of fiscal and monetary policies and this promise of intervention has been stabilizing the situation for now. However, the monetary ammunition has largely been spent during the 2007 financial crisis and many countries are still shouldering large debt issues and low interest rates such that they do not have much room for maneuver should the global economy topple under the weight of the trade war, Brexit and China slow down.
The stock market also reflected the health of the various economies, with the US stock market continue to reach new highs while Europe and Asia languishes from their April highs.
Portfolio Strategy
The portfolio has performed very well for the month of June and has reversed the losses in May. However, with a slowdown in global trade and a possible reduction of US interest rate which signals a possible weakness in market in coming months. It may be prudent to do a rebalancing and take some risk and profits off the table as the portfolio has performed very well for the first half of the year returning 11%.
We are looking to reduce the weightage of the equity component from 70% to 50%, with most of the reduction in Emerging Markets that is bearing the brunt of the slow down as a result of the trade war. The Emerging Market sphere performed extremely well this month is mainly due to a surge in Brazil and Russia as they continue to recover from their recession. Gold also saw a boost hitting a 6 year high as a loosening monetary policy boosts the value of gold. However, the out-performance may be short-lived as the effects of the slow-down in global trade continues to spread, first affecting small vulnerable trade dependent economies, to larger developing countries in the coming months and reducing the weightage of emerging economies will minimize this risk.
Meanwhile, even though we are maintaining the same weight of US equities, we are also taking a more defensive stance by re-allocation small growth US companies to more defensive healthcare companies in the form of Blackrock World Healthscience Fund. Historically, healthcare stock performs better than the average stock in a recession while maintaining a good upward return should the US economy continues to perform well.
In the bond segment of the portfolio, we are allocation into longer duration global bonds in view of a possible falling interest rate environment. Longer duration global bonds tend to perform better in a falling interest rate environment and this seems to be the macro economic trend going forward. Should the economy slows down sharply, we will allocate more weightage into the long duration global bonds.
Lastly, after many years recommending clients to regularly invest (RSP) into Aberdeen Pacific Equity, we have re-allocated the RSP into Infinity S&P500 stock index fund. Aberdeen Pacific is a value based Asia Pacific fund that focuses on stock picking value stocks in Asia, but with the rise of mobile platforms and start-ups such as Air BnB and Uber, where the rate of acquiring customers is getting more and more favored, the traditional metrics of value investing such as dividends and price-to-book ratios have fallen out of favor as the top performing companies in the last decade fail on both of these 2 value metrics. The traditional cashflow generating business which value investing usually favored also came under pressure from these new disrupting platforms and their value has been falling in recent years. We can see such pressure on SPH, which used to be a fan-favorite of dividends and value investors for being an evergreen company (government controlled media stock aka monopoly) saw their advertising revenue and readership being hammered by changing reading habits and social media platforms.
Hence, we feel that it is time to move out from the traditional mindset that "Value investing is always the best" to a more balanced method where we invest in the S&P 500, which has a good mix of value and growth large cap stock. Will value stock make a come back in the near future when the hype of digital revolution dies down, it may be possible, but we wouldn't bet my fortune on it. A balanced measured approach may be the better way as we move into a more digitally integrated future.
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