The S&P continues to grind higher, while the Shanghai Composite remains supported on its short term indicators, up 20% over the last three months. The offshore Yuan (CNY) is at its lowest (strongest) level against the US$ since March, while the trade weighted $ continues to drift steadily lower – reinforcing our view that there may be a deliberate devaluation policy coming. Sterling is back over 1.3 and the Euro is heading to 1.20. Sooner or later, asset allocators are going to notice.
Emerging market currencies are not really joining in as yet, with the JP Morgan EM currency index tracking only slightly higher, but this may well be influenced by country specific factors. The Ruble is shaping up to be stronger for example, but the Turkish lira just hit new all time highs (weakness). While technically EM countries should benefit from a weaker dollar, the offsetting Covid related economic damage may well be much more powerful. Sovereign debt issues remain a key medium term risk for markets that are not getting the attention they deserve at the moment.
Commodities, which tend to benefit from the technicalities of a weak $ have done little this last week, with both Copper and Oil moving sideways, while gold has drifted back from the $2000 an ounce level. The CRB commodities index continues to drive higher however and it is worth noting perhaps that China’s manufacturing PMI is back above 50 and its net Copper imports have hit record highs for the second month in a row. Meanwhile the Baltic dry shipping index is also trending higher again.
Using our proprietary risk metrics, we note that end July, the S&P 500 and the Shanghai Composite are currently the only two markets to have the lowest risk scores, while Europe, UK and Japan are actually at highest risk levels, although we would note that Japan appeared to bounce quite sharply in early August. (We rank markets or sectors on a risk score from 1, lowest, highest weighting, to 5, highest risk, lowest weighting. Our definition of risk is the risk that a directional trend will continue versus the risk it will mean revert, at which point the expected return from mean reversion is taken into account). Valuations meanwhile in terms of forward multiples are close to highs in most equity markets.
When we look at the sector level, in the US we note that Tech and Healthcare remain at risk level 1, joined this month by financials and Consumer discretionary. Utilities and Consumer staples are improving – with risk dropping from 5 to 3, but energy appears to be going in the opposite direction.
Unlike the US, most European markets and sectors have struggled to recover over the last quarter and risk levels are rising with the exception of tech. Valuations are cheaper than the US equivalents. From a global factor viewpoint, momentum and Quality appear to be doing the best, with the lowest risk scores, while value scores the worst.
In bonds, high yield is fading fast, suggesting a risk off move within bonds. Encouragingly, all the new economy growth themes seem to be scoring well on the risk matrix, making us evenly distributed across the set (see below for Model Portfolios that invest on the basis of these risk scores).
Elsewhere, some crazy share price moves this week. In Asia, the most obvious was in Next Digital, the owner of Apple Daily, the vibrantly anti China newspaper of Jimmy Lai, who was arrested this week under the new Security Law. Protesters were encouraged to show solidarity and buy the stock, which leapt from 8c to 200c at one point and has since drifted back to 40c, a mere 5 x the level before his arrest.
Jimmy Lai himself owns over 70% of the stock outstanding, with a total market cap of around HKD$700m at current prices. Given that almost twice the total shares outstanding changed hands on August 11th it is difficult to see how his stake could not have been involved somehow. It will be interesting to see who actually ’owns’ the company when the next filings come out.
Trader of the month
Another intriguing recent share price gyration has come from Kodak, whose share prices went crazy at the end of July as news of an official US Corona Virus related loan began to leak. From a level of around $2.13 on July 27th, prices jumped to $2.62 on huge volume compare to the previous day – ie 1.7m shares traded, around 20x the previous day. The following day, however, when the news was ‘officially’ out, almost 285m shares traded and the share price opened at $9.63, hit $11.80, before closing at a mere $7.94. July 29th was proper day trading madness, with a further 276m shares traded and the stock opening at $18.4, and closing at $33.2, having traded between a low of $17.50 and a high of $60.
As can be seen from the graph, the realisation that the deal was not quite so guaranteed led the share price to drift off steadily and it currently sits at around $8.43, a mere 4x what it was the day before the leaks started.
What is particularly interesting is the alacrity of George Karfunkel, a major holder of Kodak stock. On 25th of July, his stock was worth around $12m. Two days later, it was worth anything between $100m and $360m, but rather than try and sell a block in an obviously massively illiquid market, he chose instead to donate 3m shares to a charitable foundation – Congregation Chemdas Yisroel – locking in a massive tax reduction. Even if Kodak aren’t benefiting from the US taxpayer largesse, someone is. His financial advisor will be hoping for a suitably large bonus no doubt.
Model Portfolios July update
We run model portfolios based on an algorithm designed to mimic our Market Thinking Investment process and using liquid ETFs to create investable portfolios. The portfolios are run in real time and currently operate as managed accounts. More detail available on request.
Our model portfolio for Global equity factors was up 3.15% in July, pushing it into positive territory year to date at 3.86%, over 500bp ahead of the benchmark, which still remains negative. Over the last 12 months is up 10.6%, around 300bp ahead, but importantly has achieved this with around half the volatility of the benchmark MSCI World.
Our Global Bond Portfolio meanwhile was up around 3.5% in July, taking its year to date number to 11.8%. over 550bp ahead of the benchmark Global Aggregates index. Over the last 12 months, this is a 15.23% return, more than double the benchmark. Volatility is higher, but this is distorted by the sharp one day moves in March.
The combination means that our 70:30 Portfolio also had a good month, up 3.28% for 6.27% year to date, over 400bp ahead of the benchmark. On a one year basis this is now 12.25% ahead, compared with a benchmark that is up 8.8%, with volatility of 11.4% versus benchmark volatility of 19.1%.
Finally our Global Thematic fund had an extremely strong month, rising 8.4%, taking its year to date return to 16.4%, against a benchmark MSCI world that is still negative 1.3% year to date. On an annual basis this gives 25.7%, versus 7.94 for the benchmark, with volatility of 11.9% versus 27.8%.
