Monday, May 18, 2020

Major Asset Class Returns

This has to be the most revealing look at how each asset class has been performing following the drastic 2-month volatile shakedown owing to the pandemic. The returns were at the end of April 2020.

The one-month figures should show the asset class that regained ground the most. The broader Russell 3000 showed the best rebound, probably because the companies were smaller, hence they got whacked a lot more on the downswing. Could the same be said for emerging markets? Yes, and no. I think as the pandemic wore on, its the emerging markets (in particular Asia and Asia-Pacific) which showed better containment and had more effective measures imposed. Coupled with the fact that most of Latin America have yet to be hit then (currently it is starting to look bad for South America).

The recovery of US REITs was a surprise to me. REITs should be in for a severe two year period. I think we are minimising the repercussions if we think REITs should have things normalised within a year. Many businesses are barely hanging on and most will not be able to see out the year. Occupancy won't be filled till at least two years down the road.

Commodities, in general, have continued its losses. Even prior to the pandemic, things have not looked rosy at all for commodities. Its 6 and 12-month performance were nearly -30%. It is still not time to do any bottom fishing here. Maybe two years down the track.

US Investment Grade Bonds, TIPs, and Foreign Developed Markets Bonds have held up the best over this crisis. This chart further amplifies what "real protection" in investment looks like. Both have managed to eke out minor gains on a 1 month, 4 months, 12 months or 3 year period. As a cautionary stance, I am bearish on USD for the next 5-10 years, and that will impact on your actual returns if you continue to invest in the first two categories. Hence Foreign Developed Market Bonds are the way to go if you are a mid to long term investor.

I would have to stress that the worst kind of asset class you can touch will be US High Yield Bonds. These are rated below BBB- and pays much higher coupon rates. Can expect a deluge of bombshells as the year drags on. Avoid this with all your might.

If you look at US stocks alone, the Russell 3000, the annualised returns over a 3 year period stood at a respectable 8%. This would indicate to me there is still froth in the US equity markets. The S&P 500 figure was even better at 9%.

As for gold, I am not a gold person. I think it is a useless metal and should have no play in the financial macro policies. Though it has done well over the crisis period, it has not done exceptionally well. Looking at their returns, I'd rather go for "real protection" instruments mentioned earlier.

I generally think that most governments have thrown out way too much cash to rescue their economies over the pandemic. I think we will see a huge surge into equities for the remainder of the year. Why? We are nowhere near the factors necessary for The Great Depression nor The Asian Financial Crisis. Last check, some people may lose their jobs, some industries may be devastated, but the majority still have cash in the bank, the majority still have equity in their properties - that is not the recipe for any great depression. Now start counting the monies thrown at the problem.

Between Jan. 1 and May 10, there were 1,465 funding activities announced, committing $15.9 trillion to the fight against COVID-19. Investments of $31.6 billion have been made via 112 program announcements, and 245 grants have supported $685 million worth of investment. Moreover, 213 tenders have seen $2 billion invested through program delivery and service partners, according to an analysis of Devex funding data supporting coronavirus efforts this year.
Since May 2, $85.5 billion in funding announcements for COVID-19 has been added to Devex’s funding database, and $7.2 billion in programs, grants, tenders, and open opportunities have been announced.Below is a snippet of the funds. 

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