ARTICLES

SUMMARY

In the month of October, US Stocks, on average fell -2.77% whilst local shares fell approximately -1.87%. It was a tumultuous month, as we saw volatility spike to above 40 in the final few days before November (i.e. per the VIX, a key indicat
or of uncertainty sometimes referred to as the “fear index”). This is normally a rare high, however it is the third time this year it reached this level. From the mid-month US stock market peak to trough on the final day of the month, stocks fell over -8%. The markets were under pressure due to the failure of the US government to agree to much needed fiscal stimulus. Furthermore, increasing global Covid-19 numbers, and the uncertainty regarding the US election (with the potential for riots in the event of a very close result) weighed heavily against share prices.  The markets since buoyed following election day as uncertainty reduced, with market soaring higher the following week as Biden was widely acknowledged by the media to have beaten Trump and positive vaccine news was released by Pfizer and Moderna.

ECONOMIC DRIVERS

In the US: Rates unchanged, new fiscal stimulus expected post-election

• The Fed’s position on rates and the view of the economy was little changed at their first meeting following October. The minutes released in October from their previous meeting showed that Reserve officials were concerned regarding lack of continued fiscal support and would commit to low rates until inflation averaged at least over 2%. As previously reported, for example, despite a handful of positive jobless claims reports, unemployment has not significantly improved, nor is it expected to in the coming month until material changes occur with regard to Covid-19. There are still over 30 million people unemployed and not looking for work and there are many people left unable to pay bills and rent without targeted fiscal stimulus as support before year-end.
• Volatility spiked to above 40 in the last week of October (i.e. per the VIX, a key indicator of uncertainty sometimes referred to as the “fear index”). This is the third time this year it reached this level (once in March at the depth of the market crash and again in June with a surge in Covid-19 cases and escalating Trump-China rhetoric). As mentioned above, in October the higher VIX was due to uncertainty around the upcoming Presidential Election, as well the failure of additional fiscal stimulus to be passed.
• As previously reported: a staggering amount of support has been deployed by the Fed in 2020, which includes aggressive emergency cuts to rates in March as well as a slew of additional policy measures, with similar action being taken around the world in developed economies in response to COVID-19. Following regulation changes the Fed has also launched Money Market Mutual Fund Liquidity Facility (MMLF) and MLF, The Pay check Protection Program Lending Facility (PPPLF), the Commercial Paper Funding Facility (CPFF), the Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit Facility (SMCCF), the latter of which is a major step toward avoiding a financial contagion that spreads to the corporate bond markets.
• Regarding fiscal measures this year, the lawmakers failed to come to agreement before the election and although previous measure were substantial, more is needed before the year end. As previously reported for 2020: Trump signed four executive orders (10^th of August) that access FEMA funds to provide emergency funds for the unemployed, to defer tax payments for those earning less than 100K and to provide assistance to home owners and renters. On the 5^th of June several changes to the Paycheck Protection Program (PPP) Act came into law, which has had the effect of easing payroll demands and gives loan forgiveness further than previously set out in April. As previously reported “Phase 3.5” of COVID related fiscal stimulus was enacted on the 24^th of April to direct 484B toward funding hospitals and Covid-19 testing. Also as previously reported: a “Phase One” 8.3B spending bill was passed on the 6^th of March, which included funding for vaccine research, and assigned money to state and local governments. On the 13^th of March, Trump declared a “state of emergency” to free up 50B in spending. On the 18^th of March “Phase Two” took the form of a stimulus bill that included free virus testing, expanded unemployment benefits and healthcare funding. “Phase Three” also known as the “CARES Act” was passed on the 25^th of March, which include 2 trillion in spending and included 300B in direct payments to earners under 75K p.a., 500B in government lending to companies impacted by the crisis, 367B in small business loans, 250B in unemployment insurance, 220B in tax cuts as well as a smaller amounts to support state governments and healthcare.

In China: recovery still underway but at slightly slower pace.

• China’s PMI fell very slightly in October to 51.4 indicating that the recovery is continuing but at a slower pace. As previously reported: the manufacturing and services as indicated by PMI and non-manufacturing PMI being 51.5 and 55.9 respectively in September. Inflation (CPI ad PPI) was also down slightly in October).
• Regarding fiscal stimulus, as previously reports: In May, China announced fiscal stimulus, which was significant at US $500B (3.6T Yuan), but still less than many other countries hit by COVID. Furthermore, the issue of 1T Yuan worth of special treasury bonds was announced (a measure not seen since 2007). The special bond quote for infrastructure was also increased from 1.6T to 3.75T yuan.
• According to the IMF, further to the above, around US 360B in fiscal support measures have been announced in China which is to include social security tax relief, increased unemployment payments, production of medical equipment and to increase spending related to controlling COVID-19.
• As previously reported, the Peoples Bank of China (PBOC) reduced bank reserve requirement further following its action in March (freeing 79B). Also, to-date, as reported previously, the PBOC deployed 174B in reverse repo operations on February 3 (i.e. very short-term loans to banks so they remain stable and able to meet cash requirements. This was followed by an additional 71B on February 4. They also cut their medium term rates by 0.1% on the 16^th of Feb.

In Australia: RBA rate reduction and stimulatory Federal Government Budget

• The RBA left rates unchanged on the 6^th of October, however, they reduced from 0.25% down to 0.1% in the first week of November. Also on the 6^th of October the government released their annual budget in which a million fewer taxpayers were forecast to be resident by end of 2022. It was also assumed a vaccine would be in-hand by end of next year. A 50 billion dollar spend was outlined, for which some of the highlights included: “JobMaker” a hiring credit for employers taking on 16 to 35 year olds, higher training spend to support upskilling jobseekers, an additional 14B on infrastructure to name a few.
• Forward GDP estimates by the government are expected to be in the 4.25% range in 2021, with recovery beginning during the end of this year. As previously reported, Australia officially recorded its first recession in 28 years at the start of September, while quarterly GDP came in lower than economist estimates (est. -6% actual -7%) for the June quarter. A resurgence of Covid-19 cases in Victoria and NSW made a new peak at the start of August before trailing off since. The RBA are still supporting credit markets and expended the eligible collateral to investment grade securities.  Also as mentioned previously: the RBA cut rates twice in March, first on the 3^rd of March by 25bps down to 0.5 percent (after having left rates unchanged at 0.75% at the previous meeting). The on the 19^th of March the RBA cut by another 25bps to their current level at 0.25%. The RBA also committed to “market operations” i.e. the purchase of government bonds in the secondary market as well as additional repo operations.
• As previously reported, to-date, the fiscal response from the government targeted businesses and the newly unemployed. There are three stimulus packages to-date as well as 11.8B total in state-level packages. The first, a 17.6B package (12^th of March) that includes cash payments of $750 to welfare recipients as well as tax breaks for small businesses.  The business incentives include cash payments of between 2,000 and 25,000 to support hiring staff and paying wages. Further to this, 2.4B will be spent on health needs, including coronavirus clinics and other related expense needs as well as 1B to support the tourism sector. The second package on the 22^nd of March, was for 66B to include income support for workers (“jobseeker payments”) and small business loans. The third stimulus package on the 30^th of March of 130B to include $1,500 fortnightly payments to employers to pass on to employees to keep them in work.
• Further to the above, an additional phase of cash payments to low income households was announced in early July, which will deliver $750 cash to around 5 million Australians, which will total around 3.8 billion.

The portfolios had mixed results during a generally soft month. 

Markets fell during the month. Subsequent to month end, the risk-on rally has continued driven by continuing promises of government intervention in markets and economies and confidence in the same, some investor exuberance, investor optimism about vaccines, improving growth and perceptions of greater clarity about the US election results. Markets have disregarded - for now - substantial and growing problems with debt, uncertainty post the US election, wealth inequality and social and political disharmony. 

We remain very concerned about medium term economic prospects including the risk of stagflation and deflation, political risks, ongoing challenges to true profitability, and elevated market valuations, and are hence participating very selectively in risk assets.  Nonetheless, we are identifying attractive opportunities for alpha generation prospectively. The greatest medium-term challenge for portfolios will probably be achieving returns without suffering unduly in continuing market crises; we are seeking exposures where we believe the prospects are most positive and valuations appear attractive in contrast to the market average.

We continue to look to diversify the portfolios where sensible. We continue to believe some meaningful exposure to assets such as precious metals is essential to navigate the coming months if governments continue to provide massive (and unsustainable) stimulus while huge issues persist, but have reduced our position a little and cashed in some profits. We note that economic and political risks remain very substantive globally.  Precious metals exposures have notably been the best performing assets we’ve owned in the last couple of years, and are notably a non-traditional exposure for diversified funds, while having been a core position for us. We prefer precious metals to overpriced bonds over the medium term and believe investor portfolios may – depending upon the path forward from here - increasingly turn away from bonds given their extremely low yields and potential susceptibility to rising inflationary pressures over time.

Our Cash Plus portfolio is very defensively positioned, while our Short-Term portfolio is relatively defensive, with both designed to be more protective over shorter term time periods than our longer duration portfolios. 

Our more medium and longer term orientated portfolios target returns and manage risk with longer term time periods in mind. The Wealth Builder’s larger risk tolerance gives us most leeway to back higher risk assets on the basis of our insights and research, while still managing risk prudently over a longer-term time frame; it is in many ways a flagship portfolio for DAC and has – along with our other portfolios - proven highly competitive with both liquid retail and institutional portfolios of a similar nature. 

DAC’s portfolios are designed to be diversified but focus on investing where return prospects are assessed as capable of meeting the return objectives of the funds over their respective time horizons. This diversification provides useful mitigation against risk over the appropriate time period consistent with each portfolio’s objective, while our active assessment of risk and return can target capital to where it appears most prospectively and appropriately placed. In this way, we are much more forward-looking than a historical SAA approach which tends to be much more biased to what has happened (for example, by relying upon past correlations and volatility which may be markedly different from the future).  We consider future scenarios actively and if there is a major regime shift, our approach should hence be much more capable inherently of adapting to different market conditions.

Extraordinary monetary and fiscal stimuli continue to be implemented by central banks.  The sheer size and extent of their actions is providing meaningful impacts on market returns and, in some cases, causing substantive dislocations from underlying company and economic fundamentals. Over time, we expect these policies to be very supportive for certain portfolio positions and require dynamic management of others. For example, and in particular, we hold meaningful weightings to ‘hard assets’ in different guises and expect these to provide valuable return and risk contributions over time, even if they are occasionally volatile. We believe real growth may be very slow in future as the large and unsustainable debt burdens, poor government policies and market interference continue to strangle real productivity growth for much of the economy.  This potentially bodes relatively poorly for traditional risk assets and index investing, upon which most traditional investment strategies and super funds are heavily dependent. Furthermore, we think good active managers will better be able to differentiate themselves and add value, in part by being able to differentiate between assets based upon their prospects in different economic circumstances and very disparate valuations.

SUMMARY

After a couple of consecutive strong months, the US stock market relented in September, retreating 3.9% for the month. Similarly, domestic shares were down on average around 3.6% for the month. The sell-off was driven by a pickup in Covid-19 numbers as well as, uncertainty around the outcome of the upcoming US Presidential Election (3^rd of November), a lack of clarity and likely delay of additional Fiscal support.  Following the end of the month Trump tested positive for Covid-19 and a narrative of stronger fiscal response from the Democratic party began to emerge. US Stocks have buoyed slightly since. The market, betting odds and polls have since seem to favour Biden over Trump (however mileage has varied with these indicators for example in the 2016 Election and with Brexit). In the meantime, the Fed and other central banks continue to provide support through extensive policy measures and near zero rates.

ECONOMIC DRIVERS

In the US: More forward guidance from the Fed, Election and fiscal uncertainty

• The Fed committed to an extension of forward guidance with respect to near zero to negative real rates at their meeting on the 17^th of September. Subsequently, the meeting minutes showed that Reserve officials were concerned there might be a lack of continued fiscal support and would commit to low rates until inflation averaged at least over 2%. In the meantime, improvement to economic conditions has been slight to meagre. As previously reported, for example, despite a handful of positive jobless claims reports, unemployment has not significantly improved, nor is it expected to in the coming month until material changes occur with regard to Covid-19. There are still over 30 million people unemployed and not looking for work
  
  
• The market volatility index (VIX) spiked from the August low of around 22 to climb above 33 in September as the market turned negative for the following couple of weeks. Volatility has since declined to around 25 and, relative to historical levels, this is still high and indicates that there is risk and uncertainty in the markets
  
  
• There is currently uncertainty around the upcoming Presidential Election, as well as whether or not there will be additional fiscal stimulus. Furthermore, as previously reported: a staggering amount of support has been deployed by the Fed, which includes aggressive emergency cuts to rates in March as well as a slew of additional policy measures, with similar action being taken around the world in developed economies in response to COVID-19. Following regulation changes the Fed has also launched Money Market Mutual Fund Liquidity Facility (MMLF) and MLF, The Pay check Protection Program Lending Facility (PPPLF), the Commercial Paper Funding Facility (CPFF), the Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit Facility (SMCCF), the latter of which is a major step toward avoiding a financial contagion that spreads to the corporate bond markets
  
  
• Regarding recent fiscal measures: Trump signed four executive orders (10^th of August) that access FEMA funds to provide emergency funds for the unemployed, to defer tax payments for those earning less than 100K and to provide assistance to home owners and renters. On the 5^th of June several changes to the Paycheck Protection Program (PPP) Act came into law, which has had the effect of easing payroll demands and gives loan forgiveness further than previously set out in April. As previously reported “Phase 3.5” of COVID related fiscal stimulus was enacted on the 24^th of April to direct 484B toward funding hospitals and Covid-19 testing. Also as previously reported: a “Phase One” 8.3B spending bill was passed on the 6^th of March, which included funding for vaccine research, and assigned money to state and local governments. On the 13^th of March, Trump declared a “state of emergency” to free up 50B in spending. On the 18^th of March “Phase Two” took the form of a stimulus bill that included free virus testing, expanded unemployment benefits and healthcare funding. “Phase Three” also known as the “CARES Act” was passed on the 25^th of March, which include 2 trillion in spending and included 300B in direct payments to earners under 75K p.a., 500B in government lending to companies impacted by the crisis, 367B in small business loans, 250B in unemployment insurance, 220B in tax cuts as well as a smaller amounts to support state governments and healthcare.

In China: more possible evidence of slow recovery

• The manufacturing and services industry in China showed some additional signs of recovery in September with the PMI and non-manufacturing PMI being 51.5 and 55.9 respectively. Export orders also rose within the manufacturing PMI above 50 for the first time since last December. This continues the recent trend of slight recovery in China, as previously reported, China GDP improved 3.2% in the second quarter
  
  
• Also as previously reported: In May, China announced fiscal stimulus, which was significant at US $500B (3.6T Yuan), but still less than many other countries hit by COVID. Furthermore, the issue of 1T Yuan worth of special treasury bonds was announced (a measure not seen since 2007). The special bond quote for infrastructure was also increased from 1.6T to 3.75T Yuan
  
  
• According to the IMF, further to the above, around US 360B in fiscal support measures have been announced in China which is to include social security tax relief, increased unemployment payments, production of medical equipment and to increase spending related to controlling COVID-19
  
  
• As previously reported, the Peoples Bank of China (PBOC) reduced bank reserve requirement further following its action in March (freeing 79B). Also, to-date, as reported previously, the PBOC deployed 174B in reverse repo operations on February 3 (i.e. very short-term loans to banks so they remain stable and able to meet cash requirements. This was followed by an additional 71B on February 4. They also cut their medium term rates by 0.1% on the 16^th of Feb.

In Australia: Rates on hold and targets unchanged for the RBA

• At the most recent RBA meeting on the 6^th of October the RBA held interest rates steady at 0.25%. As previously reported, Australia officially recorded its first recession in 28 years at the start of September, while quarterly GDP came in lower than economist estimates (est. -6% actual -7%) for the June quarter. A resurgence of Covid-19 cases in Victoria and NSW made a new peak at the start of August before trailing off since. The RBA are still supporting credit markets and expended the eligible collateral to investment grade securities.  Also as mentioned previously: the RBA cut rates twice in March, first on the 3^rd of March by 25bps down to 0.5 percent (after having left rates unchanged at 0.75% at the previous meeting). The on the 19^th of March the RBA cut by another 25bps to their current level at 0.25%. The RBA also committed to “market operations” i.e. the purchase of government bonds in the secondary market as well as additional repo operations
  
  
• As previously reported, to-date, the fiscal response from the government targeted businesses and the newly unemployed. There are three stimulus packages to-date as well as 11.8B total in state-level packages. The first, a 17.6B package (12^th of March) that includes cash payments of $750 to welfare recipients as well as tax breaks for small businesses.  The business incentives include cash payments of between 2,000 and 25,000 to support hiring staff and paying wages. Further to this, 2.4B will be spent on health needs, including coronavirus clinics and other related expense needs as well as 1B to support the tourism sector. The second package on the 22^nd of March, was for 66B to include income support for workers (“jobseeker payments”) and small business loans. The third stimulus package on the 30^th of March of 130B to include $1,500 fortnightly payments to employers to pass on to employees to keep them in work
  
  
• Further to the above, an additional phase of cash payments to low income households was announced in early July, which will deliver $750 cash to around 5 million Australians, which will total around 3.8 billion.

The portfolios all had positive results during the month.

Markets have remained sanguine, with a continuing risk-on rally driven by continuing government intervention in markets and economies and confidence in the same, some investor exuberance, investor optimism about vaccines, and improving growth. Markets have disregarded - for now - substantial and growing problems with debt, uncertainty heading into US elections, wealth inequality and social and political disharmony. 

We remain very concerned about medium term economic prospects including the risk of stagflation and deflation, political risks, ongoing challenges to true profitability, and elevated market valuations, and are hence participating very selectively in risk assets. The greatest medium-term challenge for portfolios will be achieving returns without suffering unduly in continuing market crises; we are seeking exposures where we believe the prospects are most positive and valuations appear fair.

We continue to look to diversify the portfolios where sensible. We continue to believe some meaningful exposure to assets such as precious metals is essential to navigate the coming months if governments continue to provide massive (and unsustainable) stimulus while huge issues persist. We note that economic and political risks remain very substantive globally.  Precious metals exposures have notably been the best performing assets we’ve owned in the last couple of years, and are notably a non-traditional exposure for diversified funds, while having been a core position for us. We prefer precious metals to overpriced bonds and believe investor portfolios may – depending upon the path forward from here - increasingly turn away from bonds given their extremely low yields and susceptibility to rising inflationary pressures over time.

Our Cash Plus portfolio is very defensively positioned, while our Short-Term portfolio is relatively defensive, with both designed to be more protective over shorter-term time periods than our longer duration portfolios. 

Our more medium and longer-term orientated portfolios target returns and manage risk with longer term time periods in mind. The Wealth Builder’s larger risk tolerance gives us most leeway to back higher risk assets on the basis of our insights and research, while still managing risk prudently over a longer term time frame; it is in many ways a flagship portfolio for DAC and has – along with our other portfolios - proven highly competitive with both liquid retail and institutional portfolios of a similar nature. 

DAC’s portfolios are designed to be diversified but focus on investing where return prospects are assessed as capable of meeting the return objectives of the funds over their respective time horizons. This diversification provides useful mitigation against risk over the appropriate time period consistent with each portfolio’s objective, while our active assessment of risk and return can target capital to where it appears most prospectively and appropriately placed. In this way, we are much more forward-looking than a historical SAA approach which tends to be much more biased to what has happened (for example, by relying upon past correlations and volatility which may be markedly different from the future). We consider future scenarios actively and if there is a major regime shift, our approach should hence be much more capable inherently of adapting to different market conditions.

Extraordinary monetary and fiscal stimuli continue to be implemented by central banks. The sheer size and extent of their actions is providing meaningful impacts on market returns and, in some cases, substantive dislocations from underlying company and economic fundamentals. Over time, we expect these policies to be very supportive for certain portfolio positions and require dynamic management of others. For example, and in particular, we hold meaningful weightings to ‘hard assets’ in different guises and expect these to provide valuable return and risk contributions over time, even if they are occasionally volatile. We believe real growth may be very slow in future as the large and unsustainable debt burdens, poor government policies and market interference continue to strangle real productivity growth. This bodes relatively poorly for traditional risk assets and index investing, upon which most traditional investment strategies and super funds are heavily dependent. Furthermore, we think good active managers will better be able to differentiate themselves and add value, in part by being able to differentiate between assets based upon their prospects in different economic circumstances.

We could see the current deflationary market environment morph in to a stagflationary outcome over time as we eventually recover from this shock, which potentially bodes poorly for some interest rate sensitive assets and potentially broader market exposures across bonds, property and equities over time. Furthermore, we are concerned about geopolitical tensions and other risks and shocks posing further unanticipated risks to complacent markets, as the coronavirus has. Indeed, it may take a market shock to end the current market rally and bubble given many investors appear to have become entirely valuation insensitive in the face of massive stimulus. Some illiquid assets such as commercial property may be particularly poorly placed given the likely valuation changes resulting from the coronavirus, including less need for office space and higher unemployment. We hence think investors are best served by thinking outside the box in order to better protect and grow their capital, including potentially greater use of liquid value adding alternatives (selectively chosen), discounted listed investment companies and credit securities (very selectively chosen), along with precious metals exposures. We aim to remain astute and flexible and highly risk aware and are invested in liquid assets whose weightings we will adjust over time to respond to an ever changing and likely highly challenging investment climate.

SUMMARY

On average the largest US companies in the world gained a little over 7% for the month of August. There was some optimism regarding COVID-19 vaccine viability, however, the realities are that we have no known way of speeding up the safety testing process. There are still thirty million or more unemployed people (most newly so) in the US, many of whom have no foreseeable schedule of when they might return to work. Also remarkable is that the markets closed at an all-time high and continued to rise at the start of September until the much overheated tech sector began to capitulate. The VIX (a.k.a. the fear index) has since hit its highest level (33) since mid-March (80). The vast stimulus measures, both fiscal and monetary have been key drivers for the stock market heading higher. In China a moderate recovery seems to be underway from the data being released, with construction, exports and retail sales looking slightly healthier. Meanwhile, our local share market, on average was just slightly higher, despite the country falling into a technical recession for the first time in 28 years.

ECONOMIC DRIVERS

In the US: Little change to the economy or to the prevailing COVID-19 situation

• The Fed left rates on hold through the month of August as expected at 0.25% and it is anticipated that they will remain there until at least the next meeting on the 17^th of September. It is hoped that stimulative forward guidance might be offered at said meeting. As yet no significant improvement to economic conditions have been observed or is expected in the near term. For example, despite a handful of positive jobless claims reports, unemployment has not significantly improved, nor is it expected to in the coming month until material changes occur with regard to Covid-19. There are still over 30 million people unemployed and not looking for work.
• The market volatility index (VIX) hit its lowest point in August (near 21) since the recent mid-March spike where it went above 80. It since climbed to above 33 as there was some capitulation in overheated tech stocks. Relative to historical levels this is still reasonably high and indicates that there is risk and uncertainty in the markets.
• Further to the above, as previously reported: a staggering amount of support has been deployed by the Fed, which includes aggressive emergency cuts to rates in March as well as a slew of additional policy measures, with similar action being taken around the world in developed economies in response to COVID-19. Following regulation changes the Fed has also launched Money Market Mutual Fund Liquidity Facility (MMLF) and MLF, The Pay check Protection Program Lending Facility (PPPLF), the Commercial Paper Funding Facility (CPFF), the Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit Facility (SMCCF), the latter of which is a major step toward avoiding a financial contagion that spreads to the corporate bond markets.
• Regarding recent fiscal measures: Trump signed four executive orders (10^th of August) that access FEMA funds to provide emergency funds for the unemployed, to defer tax payments for those earning less than 100K and to provide assistance to home owners and renters. On the 5^th of June several changes to the Paycheck Protection Program (PPP) Act came into law, which has had the effect of easing payroll demands and gives loan forgiveness further than previously set out in April. As previously reported “Phase 3.5” of COVID related fiscal stimulus was enacted on the 24^th of April to direct 484B toward funding hospitals and COVID-19 testing. Also as previously reported: a “Phase One” 8.3B spending bill was passed on the 6^th of March, which included funding for vaccine research, and assigned money to state and local governments. On the 13^th of March, Trump declared a “state of emergency” to free up 50B in spending. On the 18^th of March “Phase Two” took the form of a stimulus bill that included free virus testing, expanded unemployment benefits and healthcare funding. “Phase Three” also known as the “CARES Act” was passed on the 25^th of March, which include 2 trillion in spending and included 300B in direct payments to earners under 75K p.a., 500B in government lending to companies impacted by the crisis, 367B in small business loans, 250B in unemployment insurance, 220B in tax cuts as well as a smaller amounts to support state governments and healthcare.

In China: evidence of mild recovery continues

• Year on year industrial production grew at a rate of 5.6% since this time last year. Exports and the construction sector have shown improvements. Furthermore, retail sales increased by 0.5%, the first such positive growth this year. This continues the recent trend of slight recovery in China, as previously reported, China GDP improved 3.2% in the second quarter, while no other major economy has shown recovery in growth to-date.
• Also as previously reported: In May, China announced fiscal stimulus, which was significant at US $500B (3.6T Yuan), but still less than many other countries hit by COVID. Furthermore, the issue of 1T Yuan worth of special treasury bonds was announced (a measure not seen since 2007). The special bond quote for infrastructure was also increased from 1.6T to 3.75T yuan.
• According to the IMF, further to the above, around US 360B in fiscal support measures have been announced in China which is to include social security tax relief, increased unemployment payments, production of medical equipment and to increase spending related to controlling COVID-19.
• As previously reported, the Peoples Bank of China (PBOC) reduced bank reserve requirement further following its action in March (freeing 79B). Also, to-date, as reported previously, the PBOC deployed 174B in reverse repo operations on February 3 (i.e. very short-term loans to banks so they remain stable and able to meet cash requirements. This was followed by an additional 71B on February 4. They also cut their medium term rates by 0.1% on the 16^th of Feb.

In Australia: Technical recession, first in 28 years

• Australia officially recorded its first recession in 28 years at the start of September, while quarterly GDP came in lower than economist estimates (est. -6% actual -7%) for the June quarter. A resurgence of COVID-19 cases in Victoria and NSW made a new peak at the start of august before trailing off since.
• On the 1^st of September, the RBA held again rates steady at 0.25% where they have been since the 19^th of March following a series of cuts. Unemployment figures were better than expected with the official headline number being 7.5%. As previously reported the RBA has scaled back bond purchases (to-date around 50B) but are still supporting credit markets and expended the eligible collateral to investment grade securities. Also as mentioned previously: the RBA cut rates twice in March, first on the 3^rd of March by 25bps down to 0.5 percent (after having left rates unchanged at 0.75% at the previous meeting). The on the 19^th of March the RBA cut by another 25bps to their current level at 0.25%. The RBA also committed to “market operations” i.e. the purchase of government bonds in the secondary market as well as additional repo operations.
• As previously reported, to-date, the fiscal response from the government targeted businesses and the newly unemployed. There are three stimulus packages to-date as well as 11.8B total in state-level packages. The first, a 17.6B package (12^th of March) that includes cash payments of $750 to welfare recipients as well as tax breaks for small businesses. The business incentives include cash payments of between 2,000 and 25,000 to support hiring staff and paying wages. Further to this, 2.4B will be spent on health needs, including coronavirus clinics and other related expense needs as well as 1B to support the tourism sector. The second package on the 22^nd of March, was for 66B to include income support for workers (“JobSeeker payments”) and small business loans. The third stimulus package on the 30^th of March of 130B to include $1,500 fortnightly payments to employers to pass on to employees to keep them in work.
• Further to the above, an additional phase of cash payments to low income households was announced in early July, which will deliver $750 cash to around 5 million Australians, which will total around 3.8 billion.

SUMMARY

The US markets were up in July by 5.5% while domestic shares were up around 0.5% on average. The US economy has not significantly improved and there is little leading markets higher other than the substantial actions taken by the Fed in terms of monetary policy and the fiscal measures implemented by government. There is, perhaps optimism by some that a safe and viable vaccine may be found earlier than expected (for instance in Russia, where the safety measures required in the West were bypassed as they inoculated people in scale). Meanwhile however, in China, GDP has rebounded slightly and they have avoided a technical recession. China infrastructure and industry has increased which has boosted iron ore prices and will benefit our domestic resources sector. Despite the above, there remains a reasonable amount of risk and uncertainty in the markets. For example, the VIX (sometimes referred to as “the fear indicator”) remains high at around 22 which is still somewhat above the 12 to 15 range it has averaged in the several years before the pandemic.

ECONOMIC DRIVERS

In the US: Rates held steady, minimal improvement in economic conditions.

• Once again, at their most recent meeting (on the 30^th of July), the Federal Reserve elected to leave rates unchanged at 0.25%. This was expected given that recent changes to the state of the economy were minimal. Fed Chair Jerome Powell indicated that forward guidance may be given in the September meeting later this year. This, along with the track record of the Fed during the pandemic thus far is supportive to the markets. Also, as previously reported, the Fed indicated that it doesn’t expect to increase rates through 2022. To-date, negative rates have not been entertained as likely for the US, however, yield curve targeting has been discussed.
• The most recent jobless claims report was slightly better than analyst expectations and is the first time it has been recorded as less than one million since the 21^st of March. This follows the more significant non-farm payrolls report which reflects that there are still 31 million people unemployed and not looking for work.
• Market volatility has been trending downward since the recent mid-March spike where it went above 80. It is now at fresh lows since then at 22. Relative to historical levels this is still reasonably high and indicates that there is risk and uncertainty in the markets.
• Further to the above, as previously reported: a staggering amount of support has been deployed by the Fed, which includes aggressive emergency cuts to rates in March as well as a slew of additional policy measures, with similar action being taken around the world in developed economies in response to COVID-19. Following regulation changes the Fed has also launched Money Market Mutual Fund Liquidity Facility (MMLF) and MLF, The Pay check Protection Program Lending Facility (PPPLF), the Commercial Paper Funding Facility (CPFF), the Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit Facility (SMCCF), the latter of which is a major step toward avoiding a financial contagion that spreads to the corporate bond markets.
• Regarding recent fiscal measures: Trump signed four executive orders (10^th of August) that access FEMA funds to provide emergency funds for the unemployed, to defer tax payments for those earning less than 100K and to provide assistance to home owners and renters. On the 5^th of June several changes to the Paycheck Protection Program (PPP) Act came into law, which has had the effect of easing payroll demands and gives loan forgiveness further than previously set out in April. As previously reported “Phase 3.5” of COVID related fiscal stimulus was enacted on the 24^th of April to direct 484B toward funding hospitals and Covid-19 testing. Also as previously reported: a “Phase One” 8.3B spending bill was passed on the 6^th of March, which included funding for vaccine research, and assigned money to state and local governments. On the 13^th of March, Trump declared a “state of emergency” to free up 50B in spending. On the 18^th of March “Phase Two” took the form of a stimulus bill that included free virus testing, expanded unemployment benefits and healthcare funding. “Phase Three” also known as the “CARES Act” was passed on the 25^th of March, which include 2 trillion in spending and included 300B in direct payments to earners under 75K p.a., 500B in government lending to companies impacted by the crisis, 367B in small business loans, 250B in unemployment insurance, 220B in tax cuts as well as a smaller amounts to support state governments and healthcare.

In China: GDP rebound, avoiding recession.

• China GDP improved 3.2% in the second quarter, while no other major economy has shown recovery in growth to-date. This surprised economist forecasts and was accompanied by other good indicators. For instance, PMI continues to be above 50 with non-manufacturing PMI at 54.4, China currently has relatively positive outlook with regard to slow recovery. Spending on infrastructure, manufacturing, construction and raw materials is showing signs of recovery also.
• Also as previously reported: In May, China announced fiscal stimulus, which was significant at US $500B (3.6T Yuan), but still less than many other countries hit by COVID. Furthermore, the issue of 1T Yuan worth of special treasury bonds was announced (a measure not seen since 2007). The special bond quote for infrastructure was also increased from 1.6T to 3.75T yuan.
• According to the IMF, further to the above, around US 360B in fiscal support measures have been announced in China which is to include social security tax relief, increased unemployment payments, production of medical equipment and to increase spending related to controlling COVID-19.
• As previously reported, the Peoples Bank of China (PBOC) reduced bank reserve requirement further following its action in March (freeing 79B). Also, to-date, as reported previously, the PBOC deployed 174B in reverse repo operations on February 3 (i.e. very short-term loans to banks so they remain stable and able to meet cash requirements. This was followed by an additional 71B on February 4. They also cut their medium term rates by 0.1% on the 16^th of Feb.

In Australia: Rates held, more employed

• The most recent rate announcement from the RBA on the 4^th of August held rates steady where they have been since the 19^th of March following a series of cuts. Unemployment figures were better than expected with the official headline number being 7.5%. As previously reported the RBA has scaled back bond purchases (to-date around 50B) but are still supporting credit markets and expended the eligible collateral to investment grade securities.  Also as mentioned previously: the RBA cut rates twice in March, first on the 3^rd of March by 25bps down to 0.5 percent (after having left rates unchanged at 0.75% at the previous meeting). The on the 19^th of March the RBA cut by another 25bps to their current level at 0.25%. The RBA also committed to “market operations” i.e. the purchase of government bonds in the secondary market as well as additional repo operations.
• As previously reported, to-date, the fiscal response from the government targeted businesses and the newly unemployed. There are three stimulus packages to-date as well as 11.8B total in state-level packages. The first, a 17.6B package (12^th of March) that includes cash payments of $750 to welfare recipients as well as tax breaks for small businesses.  The business incentives include cash payments of between 2,000 and 25,000 to support hiring staff and paying wages. Further to this, 2.4B will be spent on health needs, including coronavirus clinics and other related expense needs as well as 1B to support the tourism sector. The second package on the 22^nd of March, was for 66B to include income support for workers (“jobseeker payments”) and small business loans. The third stimulus package on the 30^th of March of 130B to include $1,500 fortnightly payments to employers to pass on to employees to keep them in work.
• Further to the above, an additional phase of cash payments to low income households was announced in early July, which will deliver $750 cash to around 5 million Australians, which will total around 3.8 billion.

Dynamic Asset portfolios all had excellent results in what was an otherwise modest returning month for markets.

Markets have remained constructive, with a continuing risk-on rally driven by continuing government intervention in markets and economies and confidence in the same, and investor optimism about vaccines, improving growth and the opening up of economies.

Markets have disregarded for now substantial and growing problems with debt, wealth inequality and social and political disharmony.

We remain cautious on economic prospects, ongoing challenges to true profitability, and elevated market valuations, and are hence participating somewhat carefully in the ongoing market rally. Nonetheless, we realise it is important to achieve returns and are seeking returns where we believe the prospects are most positive and valuations appear fair.

The portfolios are designed to be diversified but focus on investing where return prospects are assessed as capable of meeting the return objectives of the funds over their respective time horizons. This diversification provides useful mitigation against risk over time, while our active assessment of risk and return can target our capital to where it appears appropriate in line with each portfolio’s specific objectives.

Our Cash Plus portfolio is very defensively positioned, while our Short-Term portfolio is relatively defensive, with both designed to be more protective over shorter-term time periods than our longer duration portfolios.

Our more medium and longer-term orientated portfolios produced excellent results during July. Their design targets returns and manages risk over longer term time periods, with the Wealth Builder’s larger risk tolerance giving us most leeway to invest into higher risk assets

on the basis of our insights and research, while still managing risk prudently over the longer term time frame.

We continue to look to diversify the portfolios where sensible. We remain positive that a meaningful exposure to assets such as precious metals is essential in navigating the coming months if governments continue to provide massive (and unsustainable) stimulus while huge issues persist. We note that economic and political risks remain very significant globally. Precious metals exposures have notably been the best performing asset we’ve owned in the last couple of years. While having been a core position for us it is a non-traditional exposure for diversified funds, providing a point of differentiation with how we are positioning ourselves to achieve our risk-return outcomes.

Extraordinary monetary and fiscal stimuli continue to be implemented by central banks. The sheer size and extent of their actions is providing meaningful impacts on market returns and, in some cases, substantive dislocations from underlying company and economic fundamentals. Over time, we expect these policies to be very supportive for certain portfolio positions and require dynamic management of others. For example, and in particular, we hold meaningful weightings to ‘hard assets’ in different guises and expect these to provide valuable return and risk contributions over time, even if they are occasionally volatile. We believe real growth may be very slow in future as the large and unsustainable debt burdens and government policies and market interference continue to strangle real productivity growth. This bodes relatively poorly for traditional risk assets, upon which most traditional investment strategies and super funds are heavily dependent. Furthermore, we think good active managers will better be able to differentiate themselves and add value, in part by being able to differentiate between assets based upon their prospects in different economic circumstances.

We could see the current deflationary market environment morph in to a stagflationary outcome over time as we eventually recover from this shock, which potentially bodes poorly for some interest rate sensitive assets and potentially broader market exposures across bonds, property and equities over time. Furthermore, we are concerned about geopolitical tensions and other risks and shocks posing further unanticipated risks to complacent markets, as the coronavirus has. Indeed, it may take a market shock to end the current market rally given many investors appear to have become valuation insensitive in the face of massive stimulus. Illiquid assets such as commercial property look particularly poorly placed given the likely changes resulting from the coronavirus including less need for office space and higher unemployment. We hence think investors are best served by thinking outside the box in order to better protect and grow their capital, including potentially greater use of liquid value adding alternatives (selectively), discounted listed investment companies and credit securities (very selectively), along with precious metals exposures. We aim to remain astute and flexible and are invested in liquid assets whose weightings can be adjusted over time to respond to an ever changing and highly challenging and uncertain investment climate.

The portfolios provided mixed results in what was a mixed month for markets.  

 

Markets are becoming more discriminating and digesting the prospects for different assets, with a continuing risk-on rally driven by easy liquidity and the return of speculative retail investors in the US, continuing government intervention in markets and economies, and investor optimism about the opening up of economies, with the latter being overly sanguine. 

 

We remain very cautious on economic prospects, ongoing challenges to true profitability, and elevated market valuations, and are hence too risk orientated to fully participate in any ongoing speculative market rally due to the current uncertainties and risk management taking precedence in our approach.  Nonetheless, we are seeking returns where we believe the prospects are most positive.

 

We continue to look to diversify the portfolios where sensible.  We anticipate our meaningful exposure to assets such as precious metals could prove very useful in navigating the coming months if governments continue to provide massive (and unsustainable) stimulus.  We note that economic and political risks remain very substantive globally.  Precious metals exposures have notably been close to the best performing asset we’ve owned in the last couple of years, and are notably a non-traditional exposure for diversified funds while having been a core position for us.

 

Our Cash Plus portfolio is very defensively positioned, while our Short-Term portfolio is relatively defensive, with both designed to be more protective over shorter-term time periods than our longer duration portfolios. 

 

Our more medium and longer-term orientated portfolios produced soft returns during June.  Their design targets returns and manages risk over longer term time periods, with the Wealth Builder’s larger risk tolerance giving us most leeway to back higher risk assets on the basis of our insights and research, while still managing risk prudently over the longer term time frame. 

 

The portfolios are designed to be diversified, and look to invest where return prospects are assessed as capable of meeting the return objectives of the funds over their respective time horizons.  This diversification provides useful mitigation against risk over time, and in particular the risk of permanent capital loss, while our active assessment of risk and return can invest prudently and meaningfully where it appears appropriate in line with each portfolio’s specific objectives. 

 

Extraordinary monetary and fiscal stimuli continue to be implemented by central banks.  The sheer size and extent of their actions is providing meaningful impacts on market returns and substantive dislocations from underlying company and economic fundamentals.  Over time, we expect these policies to be very supportive for certain portfolio positions and require dynamic management of others.  For example and in particular, we hold meaningful weightings to precious metals in different guises, and expect these to provide valuable return and risk contributions over time, even if they are occasionally volatile.  We believe real growth may be very slow in future as the large and unsustainable debt burdens and government policies and market interference continue to strangle real productivity growth.  This bodes relatively poorly for traditional risk assets, upon which most traditional investment strategies and super funds are heavily dependent.  Furthermore, we think good active managers will better be able to differentiate themselves and add value, by being able to differentiate between assets based upon their prospects in different economic circumstances.

 

We could see the current deflationary market environment morph continue or morph in to a stagflationary outcome over time as we eventually recover from this shock, which potentially bodes poorly for some interest rate sensitive assets and potentially market exposures across bonds, property and equities over time.  Furthermore, we are concerned about geopolitical tensions and other risks and shocks posing further unanticipated risks to complacent markets, as the coronavirus has.  Indeed, it may take a market shock to end the current market rally given many investors appear to have become valuation insensitive in the face of massive stimulus.  Illiquid assets such as commercial property look particularly poorly placed given the likely changes resulting from the coronavirus including less need for office space and higher unemployment.  We hence think investors are best served by thinking outside the box in order to better protect and grow their capital, including potentially greater use of liquid value adding alternatives (selectively), discounted listed investment companies and credit securities (selectively), along with precious metals exposures. 

 

We aim to remain astute and flexible and are invested in liquid assets whose weightings can and will be adjusted over time to respond to an ever changing and highly challenging and uncertain investment climate.

 

SUMMARY

The Australian share market was up 2.29% for the month of June. Meanwhile, US stocks, on average were up 1.84%. Some marginal improvements to the US economy were noted in terms of unemployment, with statistical estimates beating economic analyst expectations for the second month in a row, however, well over 20 million people remain newly unemployed. Furthermore, China manufacturing, construction and raw materials purchases beat analyst expectations, which has had a positive impact on local markets and exports (with Iron Ore jumping over 10% for the month).  Markets in general continue to be fuelled somewhat by the raft of fiscal and monetary policy measures made locally and in countries abroad. For example, a commitment to virtually limitless support from the US Fed has indeed propped up the markets for now, however, volatility remains around 30 after retreating from the recent June high around 40. Historically speaking, this is still very high and indicates significant risk and uncertainty remains in the equity markets and the economy.

 

ECONOMIC DRIVERS

In the US: Rates on hold, marginally better unemployment

• On the 11^th of June the Fed elected to keep the funds rate on hold again at 0.25% where, as previously reported, they have been since mid-March, following the Federal Reserve decision (as recently as 11^th of June) to not reduce rates further. Also as previously reported, the Fed indicated that it doesn’t expect to increase rates through 2022. To-date, negative rates have not been entertained as likely for the US, however, yield curve targeting has been discussed.
• The most recent unemployment report (2^nd of July) beat the expectations slightly but is still high at 11.1% (not including the significant number of people considered to be permanently out of the workforce). This is a slight improvement over recent previous reports and marks the second month in a row that beat analyst expectations.
• Market volatility briefly peaked in June around 40, up from around 30 at the beginning of the month, following Trump rhetoric around China and a resurgence in Covid-19 cases in some US states. Volatility remains high at around 30 indicating uncertainty and risk remains in the markets.
• Further to the above, as previously reported: a staggering amount of support has been deployed by the Fed, which includes aggressive emergency cuts to rates in March as well as a slew of additional policy measures, with similar action being taken around the world in developed economies in response to COVID-19. Following regulation changes the Fed has also launched Money Market Mutual Fund Liquidity Facility (MMLF) and MLF, The Pay check Protection Program Lending Facility (PPPLF), the Commercial Paper Funding Facility (CPFF), the Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit Facility (SMCCF), the latter of which is a major step toward avoiding a financial contagion that spreads to the corporate bond markets.
• Regarding recent fiscal measures: On the 5^th of June several changes to the Paycheck Protection Program (PPP) Act came into law, which has had the effect of easing payroll demands and gives loan forgiveness further than previously set out in April. As previously reported “Phase 3.5” of COVID related fiscal stimulus was enacted on the 24^th of April to direct 484B toward funding hospitals and Covid-19 testing. Also as previously reported: a “Phase One” 8.3B spending bill was passed on the 6^th of March, which included funding for vaccine research, and assigned money to state and local governments. On the 13^th of March, Trump declared a “state of emergency” to free up 50B in spending. On the 18^th of March “Phase Two” took the form of a stimulus bill that included free virus testing, expanded unemployment benefits and healthcare funding. “Phase Three” also known as the “CARES Act” was passed on the 25^th of March, which include 2 trillion in spending and included 300B in direct payments to earners under 75K p.a., 500B in government lending to companies impacted by the crisis, 367B in small business loans, 250B in unemployment insurance, 220B in tax cuts as well as a smaller amounts to support state governments and healthcare.

In China: Slight improvements in economic data

• The economic data for June was generally as expected to slightly better than expected with regard to inflation (2.5%) and PMI (50.9). With PMI above 50 and non-manufacturing PMI at 54.4, China currently has relatively positive outlook with regard to slow recovery. Spending on infrastructure, manufacturing, construction and raw materials is showing signs of recovery also.
• As previously reported: In May, China announced fiscal stimulus, which was significant at US $500B (3.6T Yuan), but still less than many other countries hit by COVID. Furthermore, the issue of 1T Yuan worth of special treasury bonds was announced (a measure not seen since 2007). The special bond quote for infrastructure was also increased from 1.6T to 3.75T yuan.
• According to the IMF, further to the above, around US 360B in fiscal support measures have been announced in China which is to include social security tax relief, increased unemployment payments, production of medical equipment and to increase spending related to controlling COVID-19.
• As previously reported, the Peoples Bank of China (PBOC) reduced bank reserve requirement further following its action in March (freeing 79B). Also, to-date, as reported previously, the PBOC deployed 174B in reverse repo operations on February 3 (i.e. very short-term loans to banks so they remain stable and able to meet cash requirements. This was followed by an additional 71B on February 4. They also cut their medium term rates by 0.1% on the 16^th of Feb.

In Australia: Rates on hold, further support for credit if necessary, another round of $750 payments

• On June 2^nd and July 7th, the RBA kept rates on hold at 0.25% where they have been since the 19^th of March following a series of cuts. As previously reported the RBA has scaled back bond purchases (to-date around 50B) but are still supporting credit markets and expended the eligible collateral to investment grade securities.  Also as mentioned previously: the RBA cut rates twice in March, first on the 3^rd of March by 25bps down to 0.5 percent (after having left rates unchanged at 0.75% at the previous meeting). The on the 19^th of March the RBA cut by another 25bps to their current level at 0.25%. The RBA also committed to “market operations” i.e. the purchase of government bonds in the secondary market as well as additional repo operations.
• The treasurer Josh Frydenberg indicated an expectation of GDP to fall by 10% in the June quarter and an unemployment rate of 10%. As previously reported, to-date, the fiscal response from the government targeted businesses and the newly unemployed. There are three stimulus packages to-date as well as 11.8B total in state-level packages. The first, a 17.6B package (12^th of March) that includes cash payments of $750 to welfare recipients as well as tax breaks for small businesses.  The business incentives include cash payments of between 2,000 and 25,000 to support hiring staff and paying wages. Further to this, 2.4B will be spent on health needs, including coronavirus clinics and other related expense needs as well as 1B to support the tourism sector. The second package on the 22^nd of March, was for 66B to include income support for workers (“jobseeker payments”) and small business loans. The third stimulus package on the 30^th of March of 130B to include $1,500 fortnightly payments to employers to pass on to employees to keep them in work.
• Further to the above, an additional phase of cash payments to low income households was announced in early July, which will deliver $750 cash to around 5 million Australians, which will total around 3.8 billion.