Portfolio Update: 29 March 2019

The GreyGull portfolio remains defensively positioned for the coming week ended 5 April. The portfolio has an 85% allocation to short-dated Treasuries (SHY) and a 15% allocation to developed market equities (ACWI).

Our year-to-date performance continues to lag versus most asset classes as the global rally in risk assets continues. We do not believe the equity rally is sustainable. Today we introduce the S&P Risk Parity Index which is the closest benchmark for assessing the performance of the GreyGull portfolio. The Risk Parity Index mimics the performance of Ray Dalio’s All Weather portfolio.

We are lagging the S&P Risk Parity benchmark on the year-to-date performance. The chart below shows the consistency of return of the risk parity benchmark versus the key asset classes. The GreyGull portfolio strives to achieve the consistency of the risk parity benchmark but with higher return. We do this by only taking risk when risk conditions are optimal. When markets rally under sub-optimal risk conditions, the performance of the GreyGull portfolio will lag.


Portfolio Update: 22 March 2019

Our portfolio is unchanged for the upcoming week ended 29 March. We remain disengaged from the frenetic rally in most risk assets and in Treasuries.

Our year-to-date returns are starting to lag that of most asset classes reflecting our conscious decision to avoid risk. We are now up 5.7% for the year versus 6.4% for the US bond index and 10.2% for global equities. We do not believe the rally in equity markets is sustainable.

Our 1-year performance remains healthy but will begin to sag if we remain under-invested for too long.







Portfolio Update 15 March


Our asset allocation is unchanged for the week ended 22 Mar. As shown below, the portfolio is defensively skewed towards short-dated Treasuries with some allocation to DM equities.

The historical performance of the portfolio is shown below. Performance has been solid but has begun to lag risk assets due to our low risk exposure.

We are not perturbed. The portfolio has crushed other asset classes over the past year and some give-back after a period of strong performance is always to be expected. If we can sustain a return of 6-8% in the coming year we shall be more than happy. Our goal is to preserve capital for retirement, not to take risk.

Some will question the wisdom of this low risk exposure given the markets’ apparent confidence in the reflation trade. After all, consensus economic forecasts support the notion that global growth will bottom-out in 2Q19F. The consensus estimates of year-ahead GDP growth for both the world and emerging markets have fallen only 30 bps and 15 bps, respectively, in the past 8 weeks. This is a slight adjustment given the sharp lowering of growth expectations for 1Q19F.

The relative stability of the year-ahead growth expectation shows that economists are indeed expecting global growth to bottom and re-accelerate in the coming quarter.

This expectation of a rebound in growth is already visible in some Chinese data . This improvement, courtesy of the monetary and liquidity easing is probably the single most important factor driving the recovery in the data.

Notwithstanding this apparent improvement, the portfolio is defensively set because markets are now set for a negative surprise.

The forward PE ratio is now back above 13x which is taking us into the peak valuation range since 2012 and is consistent with significant further improvement in Asia Ex-Japan financial conditions.

In other words, if growth fails to rebound, we think equity markets will be disappointed.

If growth does rebound, equity markets might be in even deeper trouble.

The risk here lies with bond yields. Bonds are risky on two fronts. First, the EU parliamentary elections and second, US yields are too low if growth revives.

We expect the European parliamentary elections in May will see a significant jump in the representation of far right and euro skeptic parties, perhaps to as high as 40%. As a consequence, we expect EU disharmony will worsen and expect peripheral European bond spreads will widen into the election. Now that the benchmark German 10-year bond yield is almost back to 0%, spread widening will cause most European yields to rise.

If growth rebounds, US 10-year yields will rise. The term premium on the US 10-year Treasury is sitting at an extremely low reading of -70 bp, reflecting an expectation of renewed monetary easing by the Fed.

However, even if growth does not revive, we think it will be extremely difficult for the Fed to ease amid evidence of rising wage inflation. Average hourly earnings are showing a 3.5% annual gain and the NFIB small business survey is showing the highest net balance of firms planning to raise compensation in the 43 year history of the survey.

If the consensus growth expectation is correct, we expect bonds will sell-off driving our cost of capital indicator back into the risk-off zone during 2Q19F. If the growth consensus is wrong, earnings will continue to fall, also pressuring equities, credit and commodities.

Basically, notwithstanding the bullish sentiment evident in equity and commodity markets, the risk reward environment is fragile and, under such circumstances, our investment methodology avoids risk.