The Market Wrap
Oil Sinks Into Bear Market as biotech elevates NASDAQ
During the month of July Crude oil sank into a bear market, falling below $40 a barrel for the first time since April amid renewed concerns over a supply glut. Energy producers continued to underperform the global equity rally, while emerging-market equities jumped to their highest level in almost a year.
Oil has traded 22 percent below its June high as Saudi Arabia cut prices to Asian customers and U.S. drillers boost rigs for a fifth week, fueling angst a global surplus will worsen. The S&P 500 Index has had an exceptionally strong month as it breaks to new highs, while biotechnology shares advanced.
Technology stocks led gains in the MSCI Emerging Markets Index as a gauge of developing-nation currencies reached its highest point since last July.
Investors have been mulling over the outlook for U.S. monetary policy, weighing weaker-than-expected economic growth data with more hawkish commentary from Federal Reserve officials. New York Fed Chief William Dudley said traders are underestimating how many times the central bank may raise interest rates over the next 18 months. Odds of a Fed rate hike this year have slipped below 40 percent.
Locally, we saw an interest rate cut yesterday which in theory should provide a boost to the equity market and lower the Australian Dollar. The exact opposite has occurred as investors mull over the reasons behind the banks only passing on half of the cut to mortgage lenders. It is clear that the banks margins are squeezed and there are concerns over the timing of a potential capital raising. With that aside we have seen an exceptionally strong month in equity markets and we believe that any pullback will be moderate. With a number of other sectors pushing to new highs (healthcare, Utilities) it highlights the need to look outside the top 20 for your market exposure.
Nuclear Energy
China connected its 35th nuclear reactor to the power grid last month, tying with Russia for the fourth-largest fleet of nuclear reactors in the world, according to data from the International Atomic Energy Agency. The world’s second-biggest economy connected four reactors to the grid this year and with another 20 under construction, China will rival France by the end of the decade.
Source: Bloomberg
Clinton Vs Trump : Choice of Words
The tally is in, and the picture is this: an optimistic Hillary Clinton against a far more pessimistic Donald Trump. In her speech Thursday accepting the Democratic U.S. presidential nomination, the former secretary of state called on Americans to come “together,” using the word 16 times. Republican nominee Trump used the word just once in his acceptance speech last week, focusing instead on the dangers he sees facing the country: crime (7 mentions), terrorism (12 mentions) and immigration (13 mentions).
The Growth Portfolio
The growth portfolio had a number of strong results during the month and this was highlighted by a short term opportunity we identified on REA Group. This position was closed as we believed it had run too strongly to the upside and we were keen to lock in the profits. The return for just over 2 weeks was close to 10%. Our other core holding in the growth portfolio was MQA which was closed last week for a profit of 17% on the investment. We held this position through Brexit and benefited from the strong rally in utilities.
We took a speculative short on the SP 500 in the US market which hindered our overall performance for the month. We were stopped out of this position as the market pushed to new highs providing a solid example of trade management. We have identified the NASDAQ as the key area of growth in the US and continue to hold the Nasdaq ETF which tracks this index.
The portfolio underperformed the XJO for the month but is still showing a strong outperformance since inception.
The Income Protected Portfolio
The ASX200 performed well throughout the month of July reaching fresh near 12 month highs. The Income Protected Portfolio continues to perform well.
Please see below video for an in-depth review of our current portfolio holdings and recently closed positions.
The Derivative Portfolio
July has seen the market recover strongly after the Brexit turmoil in late June. With the recovery we have seen significant falls in volatility and this is necessitating a change in the strategies we use.
We thought it would be worthwhile discussing some of the XJO trading strategies we use and the reasoning behind them. The XJO probably accounts for about 40-50% of our option trades, and they tend to be some of our most profitable positions.
We use a variety of different strategies, and sometimes it may appear that we even have opposing positions open. These opposing positions may come about for a number of reasons;
1. Differing Timeframes – We will take on trades with different expected timeframes as a means of diversifying risk. Diversification exists not just in terms of different stocks, different sectors, or geographical diversification, but we also diversify in terms of trading different strategies over different timeframes. For example we may have a 3 month view on the market that is bullish, however at the same time our short term (1-2 weeks) view may be bearish. This has happened recently where we have held a bullish position on the index for a few weeks now, and just last week we took a short term bearish position that we closed today taking advantage of a quick 2-3% pullback in the market.
2. Hedging – at times we may choose to hedge our portfolio’s to protect against falls in the markets. We may not expect the market to fall, but it may just be a period of heightened risk – such as we saw with Brexit concerns in June – that mean it’s prudent to take protection. This could lead us to have protective bearish positions in place at the same time as we may have cautious bullish positions on.
3. Time Decay – By selling options we can benefit from time decay as the premium reduces over time. A good example of this would be when we sell a call, and sell an opposing put on the index with both legs well out of the money. For example if the market is trading at 5200 we could sell a 6000 call & a 4500 put with the view that the market will trade within a 1500 point range, and we collect the premium. Typically we would do this type of trade with 3-6 months to expiry, and look to hold the position between 2-5 months.
For more information on these portfolios or to speak to a Wealth Advisor, please call 1300 220 360.
Disclaimer:
This Communication has been prepared by Vertical Capital Markets Pty Ltd (ABN 11 147 186 114 AFS Licence No. 418418) trading as VFS Group (VFS Group).
This Communication is for general information purposes only. It does not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of the information contained in this report, you should consider whether the information is appropriate in light of your particular investment objectives, financial situation or particular needs. You may wish to consult an appropriately qualified professional to advise you. Derivatives can be highly leveraged, carry a high level of risk and are not suitable for all investors. Investors should only invest in such products if they have experience in derivatives and understand the associated risks.
VFS Group and/or entities and persons connected with it may have an interest in the securities the subject of the recommendations set out in this report. In addition, VFS Group and/or its agents will receive brokerage on any transaction involving the relevant securities or derivatives.
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