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Happy Monday and week ahead! Welcome to this 19th post of investing, not rocket science! Investing Doesn't Have to Be Rocket Science: this is our Non-Expert Guide to Portfolio Management.
A quick recap of this series so far:
In the 1st post: I defined a basic portfolio framework. The objective of this million dollar portfolio is beat inflation and an equity index. The investment style presented here is Active portfolio management, without the use of leverage and a time horizon greater than 5 years. The benchmark index is the MSCI ACWI IMI.
From posts 2 to 18: I have evaluated 66 stocks and 4 potential bond additions. The portfolio is long 15 stocks, 1 Bond and short 1 stock. You can read all about it in the previous posts here: https://www.claritech.app/blog
Financial Market Update:
Equity Markets were flat to lower last week, on the back of weak economic data and a shortened 4-day week. In the US; Industrials, Consumer Discretionary and Materials were sectors that lost the most as market participants priced in a slower growth which may lead to further cuts in earning expectations. Utilities, Healthcare and Energy were the sectors that saw most gains on rising crude prices and allocation to defensive sectors. On a similar note, bond yields fell as allocation to bonds increased. According to data from Refinitiv, Money Market Funds and Bond Funds recorded inflows last week of US$ 27Bn and US$ 5.3Bn respectively, while equity funds saw net outflow of –US$ 8.5Bn. Crude oil was up 6.35% for the week on OPEC cuts in production.
US Economic Data:
· ISM Manufacturing PMI falls to its lowest level since May 2020 at 46.3
· ISM Non-Manufacturing PMI at 51.2, only its second reading below 54 in the last two years. (Previous one was 49.6 in Dec 2022)
· ADP Nonfarm Sector adds 145K jobs in March’23, lower than the 261K in Feb’23. This is the second reading in the last two years below 180K. (Previous one was 119K in Jan’23).
Europe Economic Data:
· German Factory Orders for Feb’23 was up 4.8% MoM, its 3rd consecutive month of gains.
· Euro Zone Producer Price Index in Feb’23 was up 13.2% YoY, its 6th consecutive month of declines from up 43% in Oct last year.
· Euro Zone Manufacturing PMI for Mar’23 was at 47.3, slightly lower than the previous reading of 48.5 in Feb’23, while Services PMI for Mar’23 was at 55, higher than the previous reading of 52.7 in Feb’23.
This Week: Retails Sales and Industrial Production data (Feb’23) from the Euro Area. Retails Sales, CPI and PPI data (Mar’23) from the US along with the FOMC Minutes.
Portfolio update:
· Since Inception, the portfolio is up +3.07% while the benchmark index is down -0.54%
· All Asset Classes: Equities, Bonds, Real Estate and Cash have contributed to positive performance in the portfolio.
· Risk Measures: Sharpe ratio: 3.04 Sortino Ratio: 4.37 Standard Deviation 0.35%
This portfolio has outperformed the benchmark, all asset classes have contributed to this outperformance and the risk measures are good.
All positive news currently! The challenge will be to maintain consistency.
Portfolio details:
· The largest detractors continues to be Deutsche Bank (-17.5%) and Citigroup (-9.1%). Though downward pressure continues to remain on the financial sector, these stocks have bounced up nicely from their lows last month.
· The biggest gainers: Google (+21.1%) and Glencore (+12.6%), JD.com (+9.9%) and Infineon (+4.6%)
· The hedge (short position in Nvidia) is flat (-0.1%), which means the stock is trading around the selling price. Most of this downside took place yesterday when Google announced that’s its AI Supercomputer was faster and greener than Nvidia.
Asset Allocation:
After a series of continuous evaluation, this portfolio is now 38% in Equities, 31% in Fixed Income, 5% in Real Estate and 26% in Cash. I think there is room for more equity exposure, both on the long side and the short side (hedge). More of this in future posts.
Q1 2023 Earnings Expectations
According to data from Refinitiv, the earnings for the S&P500 is expected to bottom out in this quarter and begin to rise from Q2 2023.
The top 3 sectors contributing to the total earnings are Information Technology (18.85%), Financials (18.24%) and Healthcare (15.19%).
In Europe, the earnings for the Stoxx600 is expected to bottom out between Q2 and Q3 2023.
The top sectors contributing to the total earnings are Financials (25.3%), Energy (13.2%), Healthcare (11.2%) and Consumer Cyclicals (11.2%).
Earnings revisions:
Downward Q1 2023 earnings growth revisions for the S&P500 from 13% in April last year to a growth of -5.2% YoY currently. On the other hand for the Stoxx 600, Q1 2023 earnings growth revisions have been upwards from -10.9% July last to an expected growth of +4.8% YoY currently.
Can these estimates go wrong? Yes, absolutely!
Let’s take the example of Q4 2022 earnings estimates for the S&P500, they began at an expectation of +14.2% YoY growth in Jan last year and downward revisions placed it at -1.6% YoY growth in Jan this year. The actual Q4 2022 earnings growth came in even lower at -3.2% YoY.
Earnings scheduled this week for stocks on the watch list:
Citigroup, JPMorgan and HDFC bank announce their quarterly earnings this week.
The questions for the US financials: has revenue growth bottomed out in Q3 2022? Will the dip in earnings yield and operating income margin reverse?
On the Charts:
· All three financial stocks are trading in a range for the last 5 years.
· Citigroup is currently at the lower end of its range.
· Missing analyst expectations could see negative stock price reaction for financials.
Summary:
This week, I track the Q1 2023 earnings for stocks in the portfolio and on the watch-list. This could a time to look at additions to the portfolio or to exit any of the current holdings.
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This series is for information purposes only without regard to any particular investment objective, financial situation, suitability or means. It is not be construed as a recommendation, or any other type of encouragement to act, invest or divest in a particular manner (whether explicit or implicit). We recommend that you are familiar with the terms of use.
Thanks for your time! See you in the next post!
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