ARTICLES

Against the backdrop of heightened volatility in March, the S&P500 (+4.6%) and the Dow Jones (+6.7%) rounded out their best month since November 2020, with both benchmarks posting new highs in the final week of the month. The Nasdaq 100 (+0.5%) consolidated recent gains as growth names felt the pressure of rising interest rates. In comparison, the Russell 1000 Value Index (+5.9%) outpaced the Russell 1000 Growth Index (+1.7%) by a massive four percentage points after gaining six percentage points in February (being the most significant outperformance since March 2001). The ASX 200 (+2.4%) gained only modestly compared to the global benchmarks, mainly due to the decline in commodity prices.

The rotation from Growth into Value and Large-cap into Small-cap continued in Q1 after beginning in October. Rounding out the quarter, the Russell 2000 (+12.8%), S&P 500 Mid-cap (+13.6%) and the Russell Micro-cap (+23.8%) were the best performers.

Looking at the US sector level during March, the often defensive Utilities (+10.6%) and Consumer Staples (+8.3%) both bounced during the month, pushing both sectors back into the green for the year. REITs (+6.5%) had another excellent month posting their fifth consecutive month in positive territory. The cyclical sectors also remained strong, led by Financials (+5.8%), Industrials (+8.8%) and Basic Materials (+7.7%). Energy (+2.7%) consolidated recent gains after a blistering start to the year. Since the beginning of 2021, Energy (+30.7%), Financials (+15.8%) and Industrials (+11.4%) are the only sectors in double-digit territory.

March 2021 Summary:

• The vaccine rollout and the fiscal stimulus plan in the US have exceeded market expectations since the start of 2021
• Volatility returned, and equities found a way to continue higher, with the SP and Dow posting new highs
• The US 10Y yield rose 83bps since the start of 2021, its largest quarterly gain since Q4 2016
• The AU 10Y yield fell (-9bps) to +1.78% during March but remained volatile with an expanded trading range
• Consumer and business sentiment moved back towards pre-pandemic levels in Australia
• The unemployment rate in Australia dropped to 5.8%, with the participation rate at all-time highs
• The Australian housing market remained in focus, posting a healthy gain m/m of +2.8% in eight capital cities
• Australian building approvals up a blistering +21.6% m/m in March aided by the HomeBuilder Scheme
• Global Value sectors outperformed Growth by around +10% in Q1, the most significant differential in over 20 years
• The USD was positive for the third consecutive month, pushing commodities modestly lower or sideways
• Corporate earnings in the S&P 500 are forecast to grow over 20% in Q1

US Landscape

US equity markets rallied in Q1 2021 mainly on the back of a larger than expected fiscal stimulus package in the US and the improving vaccine rollout. All this despite a bout of volatility into the back end of the quarter. Combined, the $900B stimulus in late 2020 and the recent fiscal package of $1.9T in March 2021 equal approximately 15% of GDP in the US. Late in March, President Biden announced the American Jobs Plan, which proposes an additional $2.25T in government spending aimed squarely at transport, power infrastructure and communication. This plan will join an additional $1T in spending on social programs, which is expected to be announced formally in April. The stimulus amounts still have to pass Congress, but the intention is unprecedented and much larger than what markets priced in at the beginning of the year. The Biden administration has proposed an increase to the corporate tax rate to fund the infrastructure plan, from 21% to 28%, which could take -9% of next year's corporate earnings according to one estimate.

Vaccine Rollout

Over 590M vaccine doses have now been administered worldwide, in what is the largest vaccine rollout in history. Estimates from Bloomberg show that over 150M doses have been administered in the US, which is more than the total number of positive cases since the pandemic began. Last week alone, there were 2.8M doses administered per day, and the Biden administration is hoping to have enough supply to vaccinate all adults in the US by May. Global case numbers are still trending higher, including in the US. The rate of immunisation is rising faster than the new case numbers, which is promising.

US Treasuries

Long-dated US treasuries surged higher during Q1, with the US 10Y yield rising 83bps which is the largest quarterly gain since Q4 2016. It started in January (+15bps) and continued during February (+34bps) and March (+34bps). Similarly, the 10Y-2Y yield curve steepened significantly, with the spread widening around 8bps in Q1 to +1.58%. Notably, this is the fastest rise since Q1 2008, which almost marked the beginning of the last financial crisis. However, the previous high occurred in the early 1980s in the early stages of a historic rally in equity markets.

The US Dollar

The US Dollar gained ground for the third month in a row (+2.6%) during March, and as was the case with long-dated treasuries, this was the best monthly performance since November 2016. Technicians have noted that the recent lows seen in January provided support near the 2018 lows, yet the 52-week trend of lower-highs remains in place for now. The DXY recently poked its head above the 40-week moving average, which has historically been pivotal for the index.

Commodities

Typically, a stronger USD provides headwinds for commodity prices. After a solid start to the year, the Bloomberg Commodity Index posted a -2.2% decline in March after five straight months in positive territory. WTI was down (-3.8%), and Copper fell (-2.5%). Precious Metals' lustre wore thin, with Gold declining (-1.5%) and has been negative in 7 of the 8 prior months.

The Months Ahead

Valuations remain above historically normal levels; the current market environment is unlike anything we have ever seen before. Substantial fiscal stimulus (pushing 25% of US GDP) and a stronger than expected vaccine rollout (>30% of the US population) is faster and more extensive than the market expected just three months prior at the beginning of the year. Similarly, forward projections and economic data continue to gain ground. Estimates for the US GDP predict a growth rate of +7%, which is the fastest pace since 1984, with the unemployment rate returning to 5% by the end of the year. Global COVID cases are still rising but not quicker than the average rate of vaccination. There are likely to be speed bumps ahead, but the reopening of the economy and the historic government spending plans are sure to support equity markets in the near term.

The portfolios provided satisfactory performances for the month in what was a mixed month for markets generally. 

We believe the market is quite possibly being too monocular and sanguine about the outlook given the range of possibilities, but nonetheless continues to behave like we are in a bull market.  This is in no small way due to the ongoing and massive monetary and fiscal government stimulus and investor confidence in the same.

We remain concerned about medium term economic prospects including the risk of stagflation and rising inflation (the latter is now a more consensus view), geopolitical risks, ongoing challenges to true profitability, and highly elevated market valuations, and are hence participating selectively in risk assets and always considering diversification.  The greatest medium-term challenge for all portfolios is probably achieving returns without suffering unduly in continuing market crises; we are seeking to mitigate this risk in part by avoiding the worst of the market exuberance.

We continue to look to diversify the portfolios where able and sensible.  We continue to believe some meaningful exposure to assets such as precious metals is essential as a hedge to navigate the coming months if governments continue to provide massive stimulus while huge political, social and economic issues persist.  We note that economic and political risks remain very elevated globally, albeit they are being ignored for now.  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 debt, currency and sovereign crises, and rising inflationary pressures over time, as they have already been doing. 

Our Cash Plus portfolio is very defensively positioned, while our Short-Term portfolio is relatively defensive, with both designed to be less volatile 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.  That said, the market remains challenging for everyone currently, no matter what the approach.

Extraordinary monetary and fiscal stimuli continue to be implemented by central banks and governments.  The sheer size and extent of their actions is providing meaningful impacts on market returns and, in many 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 continue to disappoint 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, albeit nominal growth may improve.  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 over the next few years, in part by being more nimble and able to differentiate between assets based upon their prospects in different economic circumstances and very disparate valuations.

We could see the previous disinflationary secular trend morph in to a stagflationary or reflationary outcome over time, albeit this depends on ongoing and very substantive policy actions.  This potentially continues to bode poorly for some interest rate sensitive assets such as bonds.  Furthermore, we believe geopolitical tensions and other risks and shocks pose further (unanticipated) risk to markets, potentially just as the coronavirus has.  Indeed, it may take a market shock to end the current market rally given many investors appear to have become entirely valuation insensitive in the face of massive stimulus.  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 (selectively chosen and now more difficult to identify), 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 can adjust over time to respond to an ever changing and potentially highly challenging investment climate.

The portfolios provided satisfactory performances for the month in what was a very challenging month for markets due to bond yields rising aggressively.  Fortunately, we avoided much of this damage given our generally low direct weightings to duration and this overvalued asset class.

We believe the market is quite possibly being too monocular and sanguine about the outlook given the range of possibilities, but nonetheless is behaving like we are in a bull market.  This is in no small way due to the ongoing and massive monetary and fiscal government stimulus and investor confidence in the same.

We remain concerned about medium term economic prospects including the risk of stagflation and rising inflation (the latter is now a more consensus view), geopolitical risks, ongoing challenges to true profitability, and highly elevated market valuations, and are hence participating very selectively in risk assets and seeking some diversification.  The greatest medium-term challenge for all portfolios is probably achieving returns without suffering unduly in continuing market crises; we are seeking to mitigate this risk in part by avoiding the worst of the market exuberance.

We continue to look to diversify the portfolios where able and sensible.  We continue to believe some meaningful exposure to assets such as precious metals is essential as a hedge to navigate the coming months if governments continue to provide massive stimulus while huge political, social and economic issues persist.  We note that economic and political risks remain very elevated globally, albeit they are being ignored for now.  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 debt, currency and sovereign crises, and rising inflationary pressures over time, as they have already been doing. 

Our Cash Plus portfolio is very defensively positioned, while our Short Term portfolio is relatively defensive, with both designed to be less volatile 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.  That said, the market remains challenging for everyone currently, no matter what the approach.

Extraordinary monetary and fiscal stimuli continue to be implemented by central banks and governments.  The sheer size and extent of their actions is providing meaningful impacts on market returns and, in many 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 continue to disappoint 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, albeit nominal growth may improve.  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 over the next few years, in part by being more nimble and able to differentiate between assets based upon their prospects in different economic circumstances and very disparate valuations.

We could see the previous disinflationary secular trend morph in to a stagflationary or reflationary outcome over time, albeit this depends on ongoing and very substantive policy actions.  This potentially continues to bode poorly for some interest rate sensitive assets such as bonds.  Furthermore, we believe geopolitical tensions and other risks and shocks pose further (unanticipated) risk to markets, potentially just as the coronavirus has.  Indeed, it may take a market shock to end the current market rally given many investors appear to have become entirely valuation insensitive in the face of massive stimulus.  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 (selectively chosen and now more difficult to identify), 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 can adjust over time to respond to an ever changing and potentially highly challenging investment climate.

Equity market volatility reappeared in the month of February alongside rising interest rates. Adding to the concerns surrounding rising rates and its potential impact on inflation, the price of crude oil surged 10% in the back half of the month to one-year highs after OPEC decided against raising production levels meaningfully. The 10-year yield in the US traded above 1.5%, and rising inflation expectations were evident when the 5-year TIPS breakeven topped 2.5% for the first time since 2008. Speculative growth stocks, in particular small caps, experienced a sharp pullback, while value stocks outperformed, led by the bounce in energy markets. In Australia, the ASX200 gained around 1.5%, notably less than the 2.7% rise in global equity indices. Earnings season was broadly robust, but even this could not offset the worries around rising interest rates late in the month. The 10-year Australian Government Bond yield ended the month of February at 1.88%, up from 0.97% at the start of 2021.

Summary

• US equity markets pushed to new highs early in February, although they finished the month off their best levels due to rising interest rates.
• Crude oil made a 52-week high while Gold traded down to an 8-month low.
• Close to 80% of the companies in the S&P 500 reported an earnings beat with estimates on EPS close to a record level.
• Total global COVID-19 vaccine doses administered reaches 240 million during the month.

US Equity Markets

February provided only modest gains for US equity markets despite pushing to fresh highs early in the month. Fiscal stimulus plans, an improved vaccine rollout and reassurance from the Federal Reserve that interest rates will remain low to support the economic recovery gave investors confidence to put capital to work. Sentiment started to wane late in the month, with the return of volatility and choppy trading as interest rates began to pick up.

US bond yields are primarily driving market direction, with the yield on the US 10-year up over 50 basis points since the start of 2021, trading higher the S&P 500 dividend yield (around 1.53%). All this on the back of an improved economic outlook, higher GDP forecasts and improved consumer spending trends. Stock market performance and bond yields tend to trade inversely. As bond yields rise (prices falling), investors will often rotate into equity markets, yet we have seen some of the strongest performing equities in the last year sell-off with the rise in yields.

Optimism about the economy returning to normal has led some investors and lawmakers to voice concerns about the possibility of a sharp rise in inflation. While many might think this is tomorrow's problem, there is a chance that the $1.9 trillion fiscal stimulus package could potentially lead to an overheated economy. The Fed is doing its best to push back on this train of thought by saying they are not worried about inflation, saying, "The economic recovery remains far from complete, and the path ahead is still highly uncertain."

US Economic Data

With the gradual improvement of economic data in the US, the pandemic's recovery is undoubtedly trending in the right direction. Consumer spending saw the most significant advance in over seven months in February, up 2.4% from the previous month, aided by an uptick in employment and the latest round of stimulus cheques. The US unemployment rate is now at 6.3%, steadily improving since the peak in April 2020 of 14.9%. Still, far from its best levels in early 2020 of around 3.4%. Consumer spending accounts for close to 60% of US GDP, so both of these factors bode well for the economic recovery.

Growth stocks vs Value stocks

Since the beginning of the COVID pandemic, Growth stocks have outperformed Value, yet in February, this was not the case, with Value outperforming by a margin of 6 basis points. Some of the best performing tech names which carry large index weightings are starting to pullback with rising interest rates, leading some to question a possible impact on earnings growth as a result. Positive momentum in the economy should boost Value names in the months ahead as the economy re-opening trade plays takes flight.

Volatility Returns

The market fear gauge measured by the Volatility Index (VIX) briefly spiked above the 31 level during the bond sell-off in the last week of the month. Historically, a rising VIX index does not always mean equity markets will decline, but it is worth noting what asset classes outperform in the event of a market pullback. For context, the VIX index spiked above 80 at the start of March 2020, so we are at modest levels by recent standards.

Copper is in Demand

The price of copper gained close to 15% during the month of February, posting its largest monthly gain in over four years as hopes for a fast recovery led investors to drive prices close to an all-time high. Demand for copper is often seen as a leading economic indicator due to its application in manufacturing and infrastructure projects. Copper futures traded as high as $4.35 per pound in February, close to the previous high set in January 2011 of $4.60 per pound.

Price of Oil

Oil surged during February, with both Brent Crude and WTI trading to one-year highs, both up close to 20% in the month. Prices have now all but recovered the COVID-19 slump as the economic recovery gains momentum. OPEC and Russia decided against unleashing a flood of crude on to the market after Saudi Arabia urged fellow oil producers to "keep our powder dry" in the face of persistent uncertainty linked to the pandemic, which helped lift prices.

Safe-haven Assets

In line with the sell-off in the bond market and other safe-haven assets, Gold declined over 6% in the month of February, which is the precious metals worst performance since late 2016. YTD spot Gold prices are down close to 8.5% as equity markets have provided better returns. Gold futures peaked in early August 2020 at around $2090 per ounce and were last traded in February at $1720 per ounce.

Bitcoin Euphoria Continues

Bitcoin enjoyed another strong month of returns, trading as high as $58,000 during February but consolidating into month-end. So far, in 2021, the cryptocurrency is up close to 60%. The optimism in the digital asset space is mainly on the back of many public companies and investment houses seeking alternative payment methods and investments. Many investors still treat bitcoin as a sideshow. Still, Elon Musk, Burger King, and Mastercard's adoption suggest it is slowly gaining acceptance by some as an alternative asset class.

The Months Ahead

With the positive momentum starting to build in the economy, the path of least resistance seems higher for risk-assets in the medium term. Still, short-term volatility is possible with interest rates backing up. The rotation from stay-at-home names into stocks that will benefit from the economy re-opening is one to watch but keep in mind that any potential spike in new virus cases as businesses begin to open their doors will impact this. Higher interest rates will spur renewed debate on whether the key driver is growing inflation pressures or the improving economic outlook as it relates to what is hopefully a receding pandemic.

The portfolios provided mixed performances for the month in what was an ordinary month for risk assets. 

Subsequent to month end, the risk-on rally has escalated.  Investor optimism about vaccines and central bank and fiscal support for markets remains overarching support.  Markets have disregarded - for now - substantial and growing problems with debt and wealth inequality, along with risks from increasing inflation, higher yields and geopolitical risks.  We believe the market is quite possibly being too monocular and sanguine about the outlook given the range of possibilities, but nonetheless is behaving like we are in a bull market.

We remain concerned about medium term economic prospects including the risk of stagflation and rising inflation (the latter is now a more consensus view), geopolitical risks, ongoing challenges to true profitability, and highly elevated market valuations, and are hence participating very selectively in risk assets and seeking some diversification.  The greatest medium-term challenge for all portfolios is probably achieving returns without suffering unduly in continuing market crises; we are seeking to mitigate this risk in part by avoiding the worst of the market exuberance.

We continue to look to diversify the portfolios where able and sensible.  We continue to believe some meaningful exposure to assets such as precious metals is essential as a hedge to navigate the coming months if governments continue to provide massive stimulus while huge political, social and economic issues persist.  We note that economic and political risks remain very elevated globally, albeit they are being ignored for now.  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 debt, currency and sovereign crises, and rising inflationary pressures over time, as they have already been doing. 

Our Cash Plus portfolio is very defensively positioned, while our Short Term portfolio is relatively defensive, with both designed to be less volatile 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.  That said, the market remains challenging for everyone currently, no matter what the approach.

Extraordinary monetary and fiscal stimuli continue to be implemented by central banks and governments.  The sheer size and extent of their actions is providing meaningful impacts on market returns and, in many 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 continue to disappoint 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, albeit nominal growth may improve.  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 over the next few years, in part by being more nimble and able to differentiate between assets based upon their prospects in different economic circumstances and very disparate valuations.

We could see the previous disinflationary secular trend morph in to a stagflationary or reflationary outcome over time, albeit this may depend on (as yet unknown) policy actions.  This potentially continues to bode poorly for some interest rate sensitive assets such as bonds. Furthermore, we believe geopolitical tensions and other risks and shocks pose further (unanticipated) risk to markets, potentially just as the coronavirus has. Indeed, it may take a market shock to end the current market rally given many investors appear to have become entirely valuation insensitive in the face of massive stimulus. 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 (selectively chosen and now more difficult to identify), 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 can adjust over time to respond to an ever changing and potentially highly challenging investment climate.

SUMMARY

Most of us were anxious to see the end of 2020 with desires of a return to normality in 2021; however, January has continued in a similar light with much for market participants to navigate already. The Democrats ended up winning both seats in the Georgia run-off election, resulting in an even split of 50-50 between Democrats and Republicans in the Senate. Protests at the US Capitol left five people dead, and as a result, the House voted to impeach outgoing President Trump, setting the stage for a trial in the Senate during the first days the new administration. Georgia's results and hopes for a substantive fiscal stimulus package after Inauguration Day kept upward pressure on US Treasury yields and buoyed asset valuations.

The COVID-19 vaccine rollout began slower than expected but has since improved. The US now accounts for over 1 million of the approximate 4 million vaccines administered every day around the world. Deaths in the US related to the virus seemed to have peaked in the first part of January and have since declined.

The recent FOMC meeting saw the Fed's chair, Jerome Powell say he does not see interest rates rising any time soon and that the committee would like to let inflation run above 2% for some time. He also noted the recent optimism in markets primarily due to the vaccine and fiscal stimulus as the main driver for higher asset prices, not the Fed's monetary policy.

Equity Market Index Performance

US equity markets posted gains for most of January, with the major indices hitting fresh all-time highs in the last week of the month. Still, volatility quickly returned in the final days, reportedly driven by retail investors activity in heavily shorted stocks. This so-called 'Reddit movement' promptly gained momentum, reportedly causing heavy losses in some hedge funds and helped drive record volumes across most US exchanges. The trading activity caused growing concerns from both Congress and US regulators with much still to play out.

The Russell 2000 (+5.2%) and Russell Microcap (+14.1%) indices were the top performers in January, with both now over +100% above their March 2020 lows. The blue-chip names in the Dow Industrials lagged (-2%) as did large caps in the S&P 500 (-1%) with both Growth and Value finishing the month in the red. The Energy sector continued the charge higher (+3.9%) leading all other sectors, with Healthcare (+1.5%), REITs (+0.7%) and Discretionary (+0.5%). Consumer Staples and Industrials declined on the month.

Treasuries, Commodities and the US Dollar

Market participants noted significant developments in the rates complex during the month on January, with the US 10y and 30y US Treasury yields breaking out of a 7-month trading range. The 10y yield ended at 1.07% gaining 15bps, and the 30y ended at 1.83% gaining 18bps. 10y US Treasury breakevens ended at 2.10% rising 12bps.

WTI ended the month on a firm footing rising +7.5% to close at $52.30 per barrel. Copper was up +1.2% and has been positive nine out of the last ten months. Precious metals were mixed in January with Gold down -2.7%, but Silver rising +2.3%. In digital assets, Bitcoin posted a relatively modest gain of +19.8%, the smallest monthly appreciation since September 2020.

The US Dollar Index (DXY) has been on the back foot for most of the last 12 months but saw a slight gain in January of +0.7%, but the trend lower still seems firmly in place for now. The DXY came close to its 2018 lows which is an expected support level in the index. Equity markets are potentially close to some corrective price action which could see a flight to safety and appreciation in the USD and US Treasuries.

US earnings season is now well underway with around 40% of S&P 500 companies having reported already. Over 80% of the companies to report have beaten EPS which is higher vs the five year average of 75% beating estimates. Earnings are above the five year average of 6.4% currently at 13.5% above consensus and sales are also higher with 75% of companies surprising to the upside compared to the five year average of 61%. Forward twelve month PE for the S&P 500 is currently at 21.8, which is above the five and ten-year averages of 17.5 and 15.9.

Australian Markets

The ASX200 posted a modest gain in January +0.3%, with Consumer Discretionary (+4.8), Communications (+2.8%) and Financials (+2.3%) leading the way. Real Estate (-4.4%), Industrials (-3.1%) and Health Care (-1.8%) sectors all lagged during the month.

Earnings season has begun with investors eager to understand how quickly corporate earnings are likely to return to pre-COVID 19 levels. Earnings upgrades in the materials and resources sectors have lifted expectations in financials on the back of an improving economic outlook in Australia.

The AUD/USD has been one of the primary beneficiaries of the risk-on tone in equity markets since the lows seen in March 2020. The AUD peaked in January at $0.7780 vs the USD and has since consolidated the strong gains seen in the past few months. The AUD/USD fell -0.6% in the month helped by the RBA's continuous dovish policy and low-interest rate settings.

House prices in Australia continued to rise in January showing a modest +0.7% gain nationally vs the previous month, but forward-looking indicators like home loan applications have increased +60% since May 2020 and risen +31.3% vs the previous year to December 2020, which is the fastest pace since 2009.

The labour market was another shining light in the local economy, adding another +50,000 jobs with the unemployment rate dipping to 6.6%. Market observers expect the rate of new employment to decrease in the coming months as it will be easier to increase hours of existing employees, rather than employing new workers.

CPI for Q4 2020 came in a little hotter than expected at +0.9% vs the previous quarter, which was due primarily to one-off changes in tobacco excise and child care costs. The core CPI figures were a more subdued at +0.4% on the quarter but still welcome news to the RBA which has struggled to shift the inflation needle in recent months.

The Months Ahead

The increase in volatility and the decline US equity indices seen in the last week of the month was relatively modest by current standards with the major indices only down around -4% from their 52-week highs and following substantial double-digits gains over the past five months. Still, while the Nasdaq 100 and S&P 500 were touching all-time highs, divergence in breadth and momentum began to appear. Many companies are now trading below their 50-day moving average and trending lower, after peaking at the beginning of January. Some market technicians note a bearish reversal pattern in US indices on the weekly timeframe, which could mean a correction is in the works.

Looking at the bigger picture, the decisive price action in recent months shows that investors are optimistic about the year ahead. The vaccine rollout is improving, and corporates are beating EPS and revenue expectations. The Fed stands ready to act. Congress is in the final stages of passing a substantial fiscal stimulus package that is expected to be around $1.9T, following the $900B seen in December 2020. In the short-term, equities could be in the early part of an overdue correction, indicated by many of the companies who have beaten expectations have traded lower following. The USD could potentially see an uptick in this scenario and is currently showing a bullish divergence.

SUMMARY

The markets ended the year on an optimistic note with US stocks posting substantial gains in the month of December and finishing the year at fresh record highs. European bourses such as Germany's DAX didn't share the same optimism, eking out a meagre 3.5% gain for the year, while France's CAC and the UK's FTSE were down double-digits for the year, handing the UK the worst performance since the 2008 GFC. A drawn-out Brexit negotiation resulted in late-stage concessions to get a deal across the line which rubbed salt in Britain's wounds. December also saw the US managing to avoid a government shutdown as President Trump reversed course and signed the budget and Covid relief bill into law on the last Sunday of the month. Prospects for boosting the aid package for US consumers quickly faded as Senate Republicans railroaded Trump's late push to raise direct payments to $2,000 per person.

Mass-scale distribution issues and commercial logistics seemed to dampen the positive news of another Covid vaccine gaining approval in the UK as the holiday e-commerce shipments overwhelmed shipping lines. The new and more easily spread Covid variant, first found in the UK, began to rear its head in more places amid Western nations logging spikes in new infections.

In the currency markets, the UK's Sterling rose to its best levels of the year during the final session, while the US Dollar Index remained under modest pressure. Gold was up slightly on the month but posted its best return for the year since 2011, up 31%, while WTI crude hovered around the high $ 40's/bbl.

In the final week of trading in December, the S&P gained 1.4%, the DJIA was up 1.4%, and the Nasdaq rose 0.7%. For the year, the S&P 500 added 16.3% and the Nasdaq surged 43.6%.

The 2020 Year in Review

2020 certainly was a year to remember with the Covid pandemic quickly spreading globally in Q1 and becoming the most extensive health crisis since the Spanish flu in the early 1900s. The global economy took a nosedive as many countries closed their borders, resulting in millions of people working or studying remotely from home. Unemployment worldwide surged, driving the US unemployment rate from 3.5% to 14.7% in two months. Q2 saw the US GDP suffer its largest annualised decline on record down -31.5%.

March saw global equity markets go into a tailspin with the Dow Jones Industrials declining 38% from the highs, with trading volumes surging, market-wide circuit breakers being triggered and the VIX closing at 82.69 on March 16 which is an all-time high. Yields in the treasury markets touched record lows, and for a very brief period, the short end of the curve went negative (1 month - 12 months duration).

WTI crude posted its worst performance on record in Q1, down -66%. In April, the May contract collapsed to a perplexing negative -$40 per barrel, caused by storage facilities nearing a full capacity as futures traders scrambled to close out positions. Even as WTI prices plunged in April, equities began to form a V-shaped recovery following massive amounts of fiscal and monetary stimulus from around the globe.

The US Fed reinstated its financial crisis playbook by quickly changing interest rate settings to zero and turning on the QE taps, by establishing US dollar swap lines between other major central banks and introducing a Primary Dealer Credit a Paper Credit Funding Facility.

US equity markets bottomed on March 23 after the Fed "committed to use its full range of tools to support the US economy in this challenging time," which many market participants saw as reminiscent of Draghi's "whatever it takes" speech from the 2012 Euro crisis. The Fed committed to purchasing "in the amounts needed" in treasuries and agency MBS which is practically unlimited QE.

In the months following equity markets in the US rebounded, which marked the beginning of the V-shaped recovery. April was the third-best monthly performance for the S&P 500 since World War 2. The initial rebound was characterised by the "working from home trade" with early leaders leveraged to Technology like video conferencing and housing. People migrated out of big cities on-mass and with the help of record-low interest rates, led to a surge in housing demand. June and August saw the Nasdaq and S&P 500 return to record highs respectively. We saw a rotation into value names as the market began pricing in the reopening of the economy. In the closing months of 2020, the "recovery trade" took flight following a raft of positive vaccine developments showing high efficacy rates.

The Covid pandemic worsened into the end of the year with record infections, deaths and hospitalisations all leading to harsher lockdown measures and a slowdown in economic activity. US Congress passed a $900 billion fiscal stimulus package late in December which led to equities closing the year at record highs.

Equity Market Index Performance

Looking at total return figures, the Nasdaq 100 was up +49% and the Nasdaq Composite +45% leading the pack, with Growth (+38%) outperforming Value (3%) by a notable 35% for the year on a sector comparison. The Dow Jones Industrials ended the year +10% with Value names lagging in the index as well. The Russell 2000 (+20%) and Russell Microcap (+21%) completed the year on a firm footing with each more than doubling from the lows seen in March. On a sector level, it wasn't all good news with Financials (-2%), REITS (-3%) and Energy (-34%) were the only sectors to end the year in the red. Conversely, Technology (+44%) and Discretionary (+33%) were the best performing sectors on a YTD basis.

Treasuries, Commodities and the US Dollar

In the US Treasury market, the 2Y yield declined 145 bps to 0.12% due to the Fed's change in interest rate policy. The long end of the curve bounced from the lows as the market started pricing in economic recovery with the 30Y yield declining 75 bps to 1.65% and the 10Y yield down 101 bps to 0.91%.

The Bloomberg Commodity Index fell -27% during the March lows, trading at levels not seen in 40 years, but a second-half recovery left it with only a modest decline for the year (-3.5%). On the flipside, Gold gained +31% for the year closing at $1,898, and Silver surged +48% closing at $26.40.

In the FX markets, the US Dollar Index (DXY) remained under pressure in H2 falling around -6.7% for the year and closing at 89.94 as US monetary and fiscal policy heats up and risk appetite increases. The AUD was strong performer, bouncing close to +40% from the initial March lows after trading down to 0.55 vs the USD. Bitcoin traded at new all-time highs at +305% for the year and certainly hasn't backed off in 2021.

The Months Ahead

The large monetary and fiscal response to the Covid pandemic and expectations for an economic recovery in 2021 has driven the market to fresh highs. Some market analysts see the price action as the early stages of a longer-term bull market with meaningful upside still to come.

There are still many considerable headwinds for the economy as countries try to navigate an increasingly nasty third-wave and numerous other factors relating to a vaccine rollout that could slow the recovery further. Potential supply shortfalls and implementation issues for the vaccine raise concerns, whilst the virus is already mutating to a more transmissible and lethal form.

The monetary and fiscal support in the market could limit any downside and provide a foundation for a sustainable economic recovery in the latter half of 2021. In the short-term, the market is possibly ahead of itself after pricing in a very efficient recovery which might not be the case. Sentiment measures like fund manager surveys and the CBOE put/call ratio continue to show extreme bullish sentiment, which can suggest a pullback is overdue. On a longer-term basis, momentum is to the upside, and if the vaccine rollout is effective and unchains the US economy, this might support a rising bull market in the year to come.

The portfolios were largely up for the month in what was a very strong month for risk assets.

Subsequent to month end, the risk-on rally has escalated. Investor optimism about vaccines and central bank and fiscal support for markets remains despite worsening COVID-19 case counts and lockdowns worldwide. Markets have disregarded - for now - substantial and growing problems with debt, wealth inequality, and meaningful political unrest. We believe the market is probably being too optimistic about the outlook.

We remain concerned about medium-term economic prospects including the risk of stagflation and rising inflation (the latter is now a more consensus view), geopolitical risks, ongoing challenges to true profitability, and elevated market valuations, and are hence participating very selectively in risk assets and seeking some diversification. The greatest medium-term challenge for all portfolios is probably achieving returns without suffering unduly in continuing market crises; we are seeking to avoid the worst of the market exuberance. We continue to look to diversify the portfolios where able and sensible. We continue to believe some meaningful exposure to assets such as precious metals is essential as a hedge to navigate the coming months if governments continue to provide massive stimulus while huge political, social and economic issues persist. We note that economic and political risks remain very elevated globally, albeit they are being ignored for now. 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 debt, currency and sovereign crises, and 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. That said, the market remains challenging for everyone currently, no matter what the approach.

Extraordinary monetary and fiscal stimuli continue to be implemented by central banks and governments. The sheer size and extent of their actions is providing meaningful impacts on market returns and in many 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, albeit nominal growth may improve. 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 over the next few years, in part by being more nimble and able to differentiate between assets based upon their prospects in different economic circumstances and very disparate valuations.

We could see the current deflationary market environment morph in to a stagflationary or reflationary outcome over time as we eventually recover from this shock, albeit this may depend on (as yet unknown) policy actions. This potentially bodes poorly for some interest rate sensitive assets such as bonds. Furthermore, we believe geopolitical tensions and other risks and shocks pose further (unanticipated) risk to markets, potentially just as the coronavirus has. Indeed, it may take a market shock to end the current market rally given many investors appear to have become entirely valuation insensitive in the face of massive stimulus. 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 (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 potentially highly challenging investment climate.

SUMMARY

Positive news related to COVID-19 vaccines and fresh hopes for US fiscal stimulus breathed new life into risk assets in November. The Dow and S&P 500 posted fresh all-time highs yet again while US Treasury yields backed up to the highest rates since March. The Dollar remained under considerable pressure, highlighted by the Euro which punched through the 1.20 mark vs the USD, providing a broad headwind for Gold and US multinationals. Crude oil tracked to the highest levels this spring, up +27% on the month as OPEC+ producers reached a deal to gradually raise output by 500K barrels per day per month, beginning in early 2021.

The US November jobs report highlighted how the renewed surge in coronavirus cases and restrictions has weighed on services demand. A drop in the participation rate and a continued rise in long-term unemployment signalled some out of work Americans have given up looking for a job. The news was seen by many to support the need for urgent action on new fiscal stimulus and, along with surprisingly strong wage growth, kept upward pressure on US Treasury yields. The 2-10 year yield spread topped 80 basis points for the first time since February 2018 as the 10-year yield reached its highest level since March. The Greenback stabilised at two-year lows ahead of the data, but its footing remained tenuous. For the month, the S&P gained +11%, the DJIA added +12.1%, and the Nasdaq was up +11.1%.

Key Takeaways for November

• Equity markets rocketed higher, on the back of a plethora of positive COVID-19 vaccine-related news, which could see distribution by year-end 2020
• Value sector stocks had their best month on record and largest outperformance vs Growth in close in over ten years
• Small-caps and Micro-caps had their best month on record seen in the Russell 2000 and Russell Microcap indices
• The Dow Jones index has it's best month since 1987
• Energy stocks posted healthy gains with the sector up +28% in November on the back of a +27% rise in WTI Crude
• Transport stocks rebounded with Airlines posting their best month on record
• Copper broke out of a 7-year consolidation range posting the best monthly performance in 9 years

US Election Results

Amongst a backdrop of record turnout for voters and a fiercely contested presidential election, Joe Biden has defeated Donald Trump by an electoral college majority of 306 to 232 which is the same margin Trump won by in 2016. Biden managed to win five key battleground states, previously won by Trump in 2016 - AZ, GA, PA, WI, MI. Republicans have gained ten seats in the House at the time of writing, several electorates remain too close to call, and the Democrats are expected to hold the closest majority in close to 80 years. Currently, the Republicans have the majority in the Senate, but two run-off elections which are taking place in Georgia in early January could result in a 50-50 split. This has implication on the timing and size of the fiscal stimulus package, corporate tax reform, and might cause the Fed to pause until the January FOMC meeting to extend the QE program to consider the size and scale of any fiscal package.

COVID-19 Developments

Coronavirus cases in the US surpassed the 10 million mark, with the third-wave accelerating faster than previously in the warmer months. Optimism about the vaccine is percolating following many positive announcements announced by Pfizer, AstraZeneca, Moderna following the US election.

The FDA is expected to announce Emergency Use Authorisation for the vaccine later in December and markets are pricing in the remarkably high efficacy rates of between 90-95% of the phase-3 trials.

Equity Index Returns

Investors piled into equities on the back of positive news relating to the vaccine, with all major indices posting double-digit gains on the month. We saw a strong rotation out of the notable 'working from home' names back into 'recovery' stocks, with a considerable bias towards small to mid-caps and multiple sectors setting historic monthly performance records.

Interestingly, Value has outperformed Growth stocks for the last three months, with the Rusell 1000 Value Index posting a +13.3% return in November compared to its Growth Index counterpart rising +9.6% (+3.8% outperformance) which is the largest since September 2008.

The Russell 2000 and the Russell Microcap indexes both had their best monthly performance ever, each posting fresh all-time highs above the previous highs seen in 2018. The S&P Midcap 400 Index also performed strongly with a +14.1% gain on the month, the best since April 2019.

Large caps didn't miss the party either with the Dow Jones Industrial Index lifting above the 30,000 level for the first time, ending the sectors two months in the red with a +12.1% return in November. The S&P 500 posted healthy gains with an +11% return, and the Nasdaq 100 bounced 1.5% within its all-time highs with an +11.1% return.

Looking closer at the sector level, we saw names which have lagged throughout the year bounce sharply, with energy leading the charge up +28% on the month, financials followed suit up +16% with their best monthly gains since April 2009. Several sub-sectors posted truly eye-watering returns with Oil services up +45.7%, Airlines +43.1%, Exploration & Production +36.7%, Defence and Space +25.4% and Solar +25.1%.

Third-quarter earnings season is mostly behind us with a record of 84% of S&P500 companies beating EPS consensus. Earnings declined only 6.3%, which was better than the expected 21% decline, which was expected at the start of the quarter.

Treasuries, Commodities and the US Dollar

US treasuries saw demand despite the extreme risk-on tone in the equity markets, leaving many bond investors perplexed. The yield on the US 10 Year was at 0.84%, and the US 30 Year yield declined slightly to 1.57%. Treasury dealers noted the uncertainty surrounding the size and timing of the next fiscal stimulus package and the possibility of further QE coming from the FOMC meeting could keep markets range-bound for the moment.

WTI Crude bounced to its highest levels since the COVID-19 crisis began in March and Copper broke out of a multi-year consolidation to post +12.2% gains on the month, having its best performance in almost nine years. Copper is up close to +70% from the lows seen in March and has now broken out of a significant technical level according to some analysts.

The allure of Gold is starting to falter with the precious metal declining for the fourth consecutive month down -5.4% in November but remains in positive territory for the year at +17.2% YTD. Gold has given back over -15% from the highs seen in August and has broken critical technical levels around $1800 per ounce.

After breaking down from a multi-year uptrend in June, the US Dollar index has continued to decline in six of the last eight months, registering a -2.2% decline for November. Whilst the risk-on tone in equity markets continues, the US Dollar is expected to remain under pressure with the next notable support level seen around 88.25 in the US Dollar Index.

The Months Ahead

Markets seem to be looking past the deteriorating pandemic issues and increase in lockdowns in the hope that a new vaccine will allow for a permanent reopening of the economy and a broad recovery in 2021. Although we see solid price action and technical breakouts across many different markets above multi-year ranges, which can serve as a precursor to economic recovery, the risk of a near-term correction remains high as markets are very extended at current levels. Sentiment indicators such as put/call ratios and surveys of investment managers are approaching highly bullish levels, which often serves as a contrarian indicator that a change in market direction is coming.

Seasonally, December carries favourable tailwinds for equity markets, going as far back is the 1950s, but this was not the case in 2019, showing the averages don't always go to plan, which has undoubtedly been the theme of 2020. Markets have a lot to digest in the coming months, including the timing and effectiveness of the vaccine, the US fiscal stimulus and additional monetary policy in the US.

The portfolios were all up for the month in what was a very strong month for risk assets. 

After month end, the risk-on rally has continued.  Investor optimism about vaccines remains despite worsening COVID-19 case counts worldwide.  Markets have disregarded - for now - substantial and growing problems with debt, uncertainty post the US election, and wealth inequality. 

We are less concerned in the short term but remain very concerned about medium term economic prospects including the risk of stagflation and rising inflation, geopolitical 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 which may be increasingly crucial as we move forward in a low return environment generally. The greatest medium-term challenge for all portfolios is probably 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 stimulus while huge issues persist. We note that economic and political risks remain very substantive globally, albeit they are being ignored for now. Precious metals exposures are now a must own hedge and asset in our view, albeit one with uncertain returns. 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 debt burdens, currency and sovereign risk and 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, albeit nominal growth may improve. 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 over the next few years, in part by being able to differentiate between assets based upon their prospects in different economic circumstances and very disparate valuations.

We could see the current deflationary market environment morph in to a stagflationary or reflationary outcome over time as we eventually recover from this shock, albeit this may depend on (as yet unknown) policy actions. This potentially bodes poorly for some interest rate sensitive assets such as bonds. Furthermore, we believe geopolitical tensions and other risks and shocks pose further (unanticipated) risk to markets, potentially just as the coronavirus has.  Indeed, it may take a market shock to end the current market rally given many investors appear to have become entirely valuation insensitive in the face of massive stimulus. 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 (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 potentially highly challenging investment climate.