March was a month of two halves. The earthquake and the nuclear crisis in Japan, continuing unrests in Middle East and North Africa and renewing concerns about European sovereign debts drove down most of the risky assets in the first half. The markets recovered gradually as the fear of Japanese nuclear disaster faded and US/UK/France started air strikes in Libya in the second half.
- S&P 500 Index ended flat for the month. The EAFE index lost 2.4% as the Japanese stocks had not recovered fully from the heavy sell-off. Emerging market stocks had a very good month, up by 5.5%. Investors poured money into emerging markets as European debt concerns and Japanese earthquake made emerging markets more attractive.
- Oil price continued its climb as the MENA unrests were still unsettled. WTI crude oil, the US benchmark, reached $106.72 per barrel. Brent crude oil, the global benchmark, was traded at 117.36 at the end of March. Gold regained its lust in the face of uncertainty, reaching record high of $1437/oz on 3/23. The DJUBS commodity index gained 2%, mainly driven by the rising oil prices. USCI underperformed DJP by 2.4%. The active commodity strategy was beaten by the passive index in March.
- REITs had a negative month. The recent U.S. housing data did not show any sign of house markets rebounding.
- The high yield bond index was flat as rising interest rates offset the income gain from coupon. Emerging market bonds gained 1.5% as a result of EM currency appreciation.
- The Multi-Asset Timing Strategy (MATS) earned 0.7%, outperforming 60/40 equity/bond benchmark by 0.7%. Since we started tracking the strategy in December 2010, the MATS has beaten the benchmark by 2.0%. Table 1 shows the details of the strategy performance.
Table 1: Performance of MATS vs. 60/40 Equity/Bond Benchmark
|Benchmark (60% SPY+40% AGG)||-0.1%|
|Excess Return Since Inception in Dec 10||2.0%|
|Emerging Market Equity|
|High Yield Bond|
|Emerging Market Bond|
Despite the uncertainties in Japan, MENA and Europe, recent economic data continue to suggest global economic expansion has remained intact. The US March ISM Manufacturing Index was reported at 61.1, well above 50. The yield curve steepened slightly. The spread between the 10-year Treasury rate and 3-month T-Bill stays at 3.38%. The Fed is still on hold and investors are in mood of searching for yield. The inflation concerns will remain in the market though there is no clear and present danger of high inflation in the near term. The prices of all the risky and inflation assets are above their 200-day moving averages and my proprietary indicators. The model continues to recommend overweights in risky and inflation assets.
If you watch CNBC or Bloomberg TV, you might have heard that some prominent investors, including Bill Gross, are selling US Treasuries. In my view, it is a great time to reduce your bond holdings, especially Treasuries and high quality bonds, which are more sensitive to interest rate changes. The ECB has indicated it will raise interest rates next meeting, and BOE may follow the suit. The Fed normally waits for the job market to improve before it starts tightening. The non-farm payrolls over the last two months were quite decent. I think the Fed will become more hawkish in the second half of 2011. Given current low levels of interest rates, investors should take the opportunity to sell bonds.
My recommendations for this month are roughly the same with a small modification. Given my bearish view on bonds, I will divide the 5% allocation in AGG to EFA and VWO equally. Both EFA and VWO have underperformed SPY YTD. They may catch up later this year. I still don’t feel comfortable with 10% allocation to gold. I am afraid the bull run of gold may soon be over once central banks across the globe start raising interest rates. So I keep the allocation to GLD to 5%.
- Risky assets (75%)
- Inflation assets (25%)
- Bonds (0%)
- Barclays US Aggregate Bond Index (AGG): 0%
- US 3-month Treasury Bill: 0%.