Investment Philosophy and Approach
The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns over time with a strong focus on capital preservation. I follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. I always invest with the primary trend of the market and do not follow a benchmark. Instead, I manage the market risk for clients. This strategy has returned +11% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. My active asset allocation approach is best illustrated in the following chart.
Gold Trader and Gold PowerTrader focus on capturing the strongest and weakest parts of gold's daily cycles, buying daily cycle lows, selling daily cycle highs and holding for 10-15 trading days, depending on the cycle count. This approach allows me to effectively manage risk. The strategy aims to capture +5% to 6% profit per trade while risking 2% each time and has a win rate in excess of 70%
Despite expensive valuations, stock markets remain well bid and my technical trend indicator remains on a 'BUY'. In the short-term, equities are overbought and due for a pause or correction. If the bullish technical setup persists as we navigate past the seasonally difficult August to October period, I will add equity exposure to the Active Asset Allocator. For now, I remain patiently in defensive mode. I also am planning to tilt the regional equity exposure away from the US towards Europe, where stock market valuations are more compelling. Stay tuned.
This month, I added 5% to UK index linked gilts and 5% to US inflation linked bonds in the Active Asset Allocator, lowering the cash position from 20% to 10%. The bond market is pricing in almost no inflation in our future and I believe that is a mistake. The Active Asset Allocator continues to hold a 20% allocation to fixed interest rate bonds but the clock is ticking on this trade and I have one eye on the exit door. On precious metals, the World Gold Council published its Q2 2016 update on Gold Demand Trends and noted a +141% year/year increase in investment demand. it's a bull market folks. I also closed out Trade 7 for Gold Trader on Friday at breakeven. I remain defensively positioned for now with 20% equities / 40% bonds / 30% precious metals / 10% cash.
Stock Market Update
My technical studies triggered a buy signal for the stock market on 15th April 2016 and it remains in place today. Since this trigger, global stock markets have rallied +4% in aggregate. US equities have gained +4%, European stocks are unchanged while emerging market equities have added +8%. (EU bonds and gold have also rallied over the same period with bonds +4% and gold +9%). I have been reluctant to follow the buy signal for equities to date, largely due to valuation concerns. Today, the S&P 500 trades at 25 times reported earnings. The S&P 500 has traded at a valuation above 24 times reported earnings only 9% of the time since 1928. If we exclude the tech bubble and 2008 financial crisis, when corporate earnings all but disappeared, that number drops to just 2%! We are also entering the historically difficult August to October period where stock markets have suffered significant declines in the past.
However, despite expensive valuations, the market's technical picture has recently improved. The number of stocks making new lows has evaporated while the number of stocks breaking out to new highs continues to increase (lower left chart). This is a prerequisite for another leg higher to develop in what is a maturing equity bull market. Central banks around the world continue to add fuel to the fire with the Bank of Japan, ECB, Swiss National Bank and People's Bank of China being particularly active in 2016 YTD (lower right chart).
The next chart is quite revealing and one to which I am paying close attention. It shows the performance of consumer cyclical versus consumer staple stocks. Consumer cyclical stocks rely heavily on the business cycle and include industries such as retail, automotive, housing and entertainment. Consumer staples tend to perform better during recessionary periods and include non-cyclical industries such as food, telecom, utilities and healthcare. So when the trend is rising, Cyclicals are outperforming Staples, and stock markets tend to do quite well. When the trend reverses and Staples outperform Cyclicals, markets tend to struggle. The chart took a sharp decline in late 2015 signalling that all was not well for stock markets and true to form, they have struggled so far in 2016. However, Consumer Cyclicals have started to show some relative strength in recent months and may be about to break out above the down-trending 50WMA. This would be quite a bullish development and allow me to become more constructive on the outlook for equities.
In another positive development, a significant 78% of stocks on the NYSE are now trading above their long-term 200DMA, signifying broad participation in this recent stock market rally.
In the short-term, equities are overbought and due for a pause or correction. If stock markets can hold firm over the next couple of months and my technical studies remain favourable, I will increase the equity allocation in the Active Asset Allocator. I also am planning to tilt the regional equity exposure away from the US towards Europe, where stock market valuations are more compelling. Stay tuned.
For more information on my stock market analysis, please get in touch. You can reach me at email@example.com or at 086 821 5911.
Bond Market Update
This month, I added a 5% allocation to UK index linked gilts and a 5% allocation to US inflation linked bonds, lowering the cash position in the Active Asset Allocator from 20% to 10% to fund the purchases. The bond market is pricing in almost no inflation in our future and I believe that is a mistake. Printing money always leads to inflation, eventually. We have experienced 7 years of asset price inflation (rising equity and property prices) and are starting to see increasing signs of wage inflation this year. In the United States, while inflation linked bonds continue to underperform Treasuries, technical signs of a change in trend are at hand. Relative strength (RSI) and momentum (MACD) indicators are improving in favour of inflation-linked bonds and price should follow suit later this year.
Inflation linked bonds are also rallying in the United Kingdom and the recent 15% drop in GBP should accelerate this trend. Falling unemployment, wage inflation and continued loose monetary policy by the Bank of England should provide an additional tailwind.
Central banks have already driven government bond yields to zero or below and are now examining alternative ways to distribute a continuing flow of newly printed money. Accelerated fiscal spending and/or direct payouts to the public (helicopter money) are potentially on the cards. Trends in wage inflation have also started to rise in the US recently. I expect the bond market to start pricing in a more inflationary outlook and inflation linked bonds should be a beneficiary.
The 35+year bull market in fixed interest rate (rather than inflation-linked) bonds is in its final innings. We could be entering the final blow-off phase, which, when it ends, will unleash pain and chaos across multiple asset markets, but we are not there yet. Rising bond yields, when they do come, will lead to significantly lower prices for long duration fixed interest bonds and equities alike. (Stocks are simply a claim on a future stream of cash flows, discounted at the prevailing market rate. When that interest rate goes up, the present value of a stream of cash flows declines. it is simple mathematics). The Active Asset Allocator continues to hold a 20% allocation in fixed interest rate bonds but the clock is ticking on this trade and I have one eye on the exit door.
To learn more about the full range of investment services available at Secure Investments, please contact Brian by email at firstname.lastname@example.org or at 086 821 5911.
Gold Market Update
The World Gold Council has published its quarterly report on gold demand trends for Q2 2016 with some interesting highlights. The report details a 15% increase in overall gold demand year/year driven by a +141% increase in investment demand. The main buyers continue to come from India and China, though US investor demand is also on the rise. Gold supply increased +10% with total mine supply +5% year/year.
The increasing appetite for gold is evident in the next chart where you can see that gold is rising at a faster rate than either of the prior two times when gold broke out above its long-term 20-month MA. Investors want in and are increasingly happy to pay higher prices to get their bullion.
Gold outperformed stocks from 2000 to 2011 before entering a bear market that ended last year. Gold has started to outperform the S&P 500 once again this year, a trend that I expect will remain in force for at least the next 2-3 years and perhaps quite a bit longer.
The gold miners are leveraged plays on the price of gold. The index of gold and silver miners has already rallied +192% since the low made on 19th January 2016. The miners are a notoriously volatile sector of the market but for those with patience and an iron stomach, fortunes will be made in this sector before the bull market ends.
For more information on my gold market analysis, please get in touch. You can reach me at email@example.com or 086 821 5911.