The month of May did not see any of the theatre that was anticipated, in fact there was a sense of calm over the markets and the general feeling was that everything was alright. This transpired to a 2.6% return for the index and a drop in volatility to long term lows.
The most significant moment of the month came when Federal Reserve Chief Janet Yellen said in a speech at Harvard University “the time was right to gradually and cautiously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate. The economy is continuing to improve … growth looks to be picking up”.
On the back of this comment the market rallied and this was a big Uncle Sam moment where good news became good news again. I actually can’t recall the last time this occurred but it feels like things could be returning to the “normal”, as in the pre GFC normal, as in traditional economic theory normal.
Unemployment has continually declined and has fallen below 5% for the first time since Q1 2008- see chart below
New housing starts in the US have continually been on the rise and during the month of April we saw a significant beat. Remember this is in an environment of rising interest rates- see chart below
On the other side of the world in Australia we are in an environment of lowering interest rates. There was no doubt that the latest cut caught the market by surprise. The line being towed by the governer is that “ inflation is really a bit too low” and that the RBA has “’adequate flexibility to look at the broad picture”. Remember Australia is still in the bad news is good news cycle. Below is the survey of next weeks interest forecast. Only 1 economist is predicting another cut and it would be almost unheard for the RBA to cut 2 months in a row.
Iron ore has pivoted from boom to gloom in the space of just a few weeks, with prices sinking back toward $50 a metric ton as a 23 percent loss this month eviscerated April’s speculation-driven rally. Seaborne supply is rising while the Chinese steel mills will reduce purchases. Oversupply should extend into the rest of 2016, iron ore fell on Monday at $51.22 a dry ton.
VFS Growth Portfolio
During the month of May we locked in some profits and reduced our exposure to the market. The wider market has now rallied up to level where we are conscious of taking some money off the table. We had some exceptional returns on investment including CKF where we locked in an 18% return for the month and we also made 17% on TNE.
Our trailing stops were hit on MTS and GEM, both of these trades were breakeven.
Overall the portfolio returned 1.89% for the month which was a reflection of the higher than normal cash balance we are holding. Year to date the portfolio is now outperforming the XJO index by 18%.
Currently the portfolio holds 2 positions. Macquarie Atlas (up 4%) and we have also purchased some exposure to the Nasdaq which we are currently breakeven on. This position on the Nasdaq is unhedged so we have some exposure to the AUD/USD pair.
VFS Income Protected Portfolio
In the month of May, we updated our position on Transurban and also added Suncorp to our Portfolio. This brings our total average return 6.06%p.a
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