Amidst a month or two of headline-grabbing volatility in sharemarkets, there is comfort in having a robust and venerable investment process. Diversified was conducting its regular, Quarterly strategy review during May. Our asset allocation process is forward-looking. Positions are based on our one-year to 18-month ahead economic fundamentals, tempered by a proprietary view of valuations. To recap:

• Fundamentals remain positive. The world’s economy is forecast to expand in aggregate, at over 4% p.a. this year and next; companies have returned to good profitability; credit remains cheap; massive government stimuli continue, and; a large portion of institutional funds are ‘parked’ in Cash & Bonds. 
• Additional positives include inflation being moderate in most places, and belated recognition of the profligate and debt-fuelled habits of many western governments, are unsustainable.

This relatively promising fundamental economic backdrop, contrasts sharply with headline-grabbing prognostications of several market chartists, fears of imminent market collapse and foreboding descent into global economic depression (the ‘stock the bunker with powdered-eggs, water purification tablets, and buy ammo’ brigade).

• Diversified takes comfort that ‘double-dip’ recessions are extremely rare (once in 90 years, and that in 1981). Statistical harbingers of recession signal a near-zero probability of that occurring in the next year, while Leading Economic Indicators remain resolutely positive.
• Diversified finds little predictive power in the ‘technical analyst’s dire warnings, nor in the predictive power of chart patterns to repeat. Doomsday is leaving some golden era. Rather, doomsday ranting may owe more to Mark Twain’s observation, “I find that the further I go back, the better things were, whether they happened or not”.

Economic and Financial Market uncertainty are ever-present, are historical and will endure. Systematic diversification of investments across uncorrelated or lesser correlated asset classes, in accordance with Modern Portfolio Theory, is the sole defence against the unknowable.

• Diversified pursues MPT supplemented with our tactical overlays.

Model asset allocations and portfolios are substantially as the prior quarter.


 
   

Norman W. Stacey (n.stacey@diversified.co.nz)
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