Performance Review: June 2020
- Thursday, 09 July 2020
- Written by Amirudin Hamid, Portfolio Manager of GAX MD
For June, the weaker US Dollar (USD) masked down the returns of all MYTHEO functional portfolios in Malaysian Ringgit (MYR) as only the Growth and Inflation Hedge portfolios were up, while the Income portfolio declined. Yet, from the view of USD, all the three functional portfolios expanded as shown in the table below.
In MYR, the Growth and Inflation Hedge portfolio rose by 1.56% and 1.31% respectively. The Income portfolio however declined by 0.79%.
Source: Gax MD Sdn Bhd, July 2020
Chart 1: Functional Portfolios' Performances in MYR for the month of June 2020
Source: Gax MD Sdn Bhd, July 2020
The GROWTH portfolio rose by 1.56% in MYR
The Growth portfolio eased up higher for three consecutive months. Hong Kong (EWH) market was the best performer after an 8.26% gain in June. What was surprising is how the Hong Kong market reversed from a loss of 5.23%.
Concerns over political risks in Hong Kong tapered off after protestors stayed out of the streets. Also, the market received a spill-over effect from the recovery of the service sector in China. One of the most followed economic data by professionals, the Caixin Service Purchasing Managers Index rose to 58.4 in June, the highest reading in two months. The index was well above 50, indicating that the service sector was growing strongly.
US large-cap value stocks (VTV) and US mid-cap value stocks (IWS) were among the laggards inside the Growth portfolio with negative returns of 2.39% and 0.28%, respectively.
One reason for this is the rising new cases of coronavirus in the US. Beyond this, there was evidence that investors were selling US large and mid-cap stocks to buy US small-cap stocks that have been lagging for years.
It was so unusual, despite losses to large and mid-cap stocks, that the US small-cap value stocks (IWN) was trading with a 6.77% gain for the month.
The INCOME portfolio eased by 0.79% in MYR
The weakening of USD against MYR weighed on the performance of the Income portfolio. In June, USD shed 1.45% against MYR, which was the weakest monthly performance since November 2019. If we strip out the translation forex losses, the income portfolio should have appreciated by 0.68%.
Weeks ago, we highlighted that currency volatility tends to have a significant impact on MYTHEO performance over a monthly or yearly basis. However, the effect over a long-term is very minimal. To understand this better, do read an article we have published that discusses the currency impact on MYTHEO’s portfolio here.
Only investment-grade corporate bonds (LQD) and international treasury bonds (BWX) trended higher in June. LQD was up by 0.71%, driven by a sharper reduction in cost of lending on a better outlook for the corporate borrower. Meanwhile, BWX inched up 0.44%, thanks to its considerable exposure outside the US market and non-USD currency.
The INFLATION HEDGE portfolio up by 1.31% in MYR
US real estate and commodities raced higher in June. Real Estate Mortgage (REM) traded up by 10.62% after a report had shown that the property market was turning around in the US. The National Association of Realtors reported that pending home sales spiked by 44.3% in May compared with April.
Also, the commodities sector extended the rally on a positive demand outlook along with the recovery of the economy. Except for Agriculture (DBA), commodities such as Oil (DBO), Metal (DBB), and Gold (IAU) were all up by 6.05%, 3.24% and 1.36% respectively.
DBA underperformed relative to the other commodities over the uncertainty of the trade agreement between the US and China. China to increase the purchase of US agriculture is a crucial plan agreed upon in the phase one trade agreement. Given the pandemic situation, China has not been able to meet the requirement, threatening to revoke the whole deal.
Chart 2: Summary of Performance YTD in MYR as of 30 June 2020
Source: Gax MD Sdn Bhd, July 2020
Chart 2 above shows the cumulative performance of the functional portfolios since the beginning of 2020. The Growth portfolio registered a return of –13.08%, the Income portfolio was up by 7.46% and the Inflation Hedge portfolio dropped by 8.56%.
It must be noted that, the actual portfolio returns to the investors is the combined weighted return from the allocation to each functional portfolio. For example, if an investor allocates the investment equally: 33.3% in Growth, 33.3% in Income and 33.3% in Inflation Hedge, the actual portfolio return is (33.3% x -13.08%) + (33.3% x7.46%) + (33.3% x -8.56%) = -4.73% over a six-month period from January to June 2020.
What's Happening in The World Market?
At the start of the month, there were some negative surprises. Initially, the market was on edge due to the countrywide protests in the US and the army confrontation near the China-India border. However, investors were very relieved when both events did not further escalate and had little influence on market sentiments.
What concerned investors more was the spike of new COVID-19 cases in the US, where new cases hit above 40,000 a day. As new cases kept rising, investors became less optimistic that the US economy rebound may not be as swift as initially expected.
Despite all these, the riskier financial assets were trending higher after investors bet that more fiscal support is to be announced in the US to support the economy.
Away from the US, everything was more clear-cut. The economic report out in China confirmed that economic activities continue to strengthen. In the Eurozone, the European Central Bank (ECB) declared that the region had passed the worst of the economic crisis caused by the pandemic.
In June, bulls and bears appeared to be more evenly matched. On one side, the rising infection cases in the US has become a new threat and a cause for concerns. On the other side, in Europe and China, the worst has probably passed, and the economy has started showing a positive sign of recovery. Meanwhile, the Emerging Markets turned more positive, benefitting directly from the rally of commodity prices and the weakening of USD.
The recent market condition was well reflected by the performance of MYTHEO’s portfolio. US large-cap and mid-cap stocks return may be negative, but the overall portfolio performance was still positive.
For the second consecutive month, investments outside the US were aiding the performance of MYTHEO portfolios.
These are the benefits of having a geographically diversified portfolio. The negative returns in one investment is compensated by the positive returns in other investments. Not a single market can do well all the time. Predicting and chasing the cycle for each market is impossible. It is always much easier and usually cheaper to buy a basket of stocks that works in different market cycles.
In MYTHEO, this is exactly what you can achieve. Through a single platform, you are automatically invested in over 25 ETFs with more than 10,000 underlying stocks across 80 countries and equipped to ride through any market cycle. This is all made possible in just a moment at your fingertips.