Simplify your investment approach during market uncertainty
Global financial markets were largely stable but down slightly last week due to weak first quarter earning results from corporations and oil prices turning negative (we’ll go into this below). The U.S.’ S&P 500 Index was -1.32% last week and -12.20% year to date. Hong Kong and China stocks were also down slightly with the Hang Seng Index and CSI 300 Index -2.25% and -1.11% last week and -15.46% and -7.31% year to date.
AQUMON’s diversified ETF portfolios were +0.12% (defensive) to -2.18% (aggressive) last week and -0.73% (defensive) to -11.07% year to date (aggressive) year to date. The biggest return drivers last week were gold and energy stocks (even though WTI oil was -7.28% last week).
In times of uncertainty simplify your investment approach
As we alluded last week there is a strong divergence between current weakening economic conditions and the strong rally in stock markets. Even for many experienced individuals in the financial industry it is tough to ‘make sense’ of this recent movement given market drivers include a combination of investors:
1) disregarding market fundamentals
2) looking beyond the short term on the expectation of a fast economic recovery and
3) stimulus from central banks globally will backstop the market
It is uncertain times like this that we often need to remind ourselves why we are investing in the first place.
The answer: that we are looking to build and preserve our wealth over time.
There is definitely value in long term investing but staying disciplined is extremely hard especially with so many recent factors affecting our ability to remain calm and rational.If that is the case we find simplifying your investment process the easiest way to keep yourself on track in terms of your investment goals.
Things to consider include:
1) Consider a dollar cost averaging approach: Instead of timing when to invest in an uncertain market one thing we should be looking at is whether investments are simply expensive or cheap relative to your portfolio. As long as we can continue to periodically accumulate when markets are ‘cheaper’ then your portfolio’s average cost you will be systematically lowering your cost. You’ll thank yourself when markets finally stabilize and rebound.
2) Contribute in smaller amounts: We understand it can feel scary to invest in the current investment environment (even for seasoned investors) but a simple way to better control both your emotions and your portfolio’s risk is by contributing in smaller tranches during this period. For example if you plan to invest HK$50,000 consider splitting that into 2-3 tranches and investing it little by little. It’s better to consistently contribute a little than not to contribute at all. This will get you comfortable with sticking with your long term investment plan without getting derailed by your emotions and sensational news headlines. As a result you will take advantage of the most powerful element of investing, the power of compounding your returns over time. Even in an extreme case of another large sized selloff at least you won’t have lost your shirt in the process since you are investing in smaller tranches.
3) Understand and manage your risk: Staying calm and rational investing in the current environment starts simply first with the understanding that larger market movements may be ahead. This will minimize your emotional knee jerk reactions when faced with market ‘surprises’. Although we are quite blessed in Hong Kong with less disruption from the coronavirus as an investor your top priority is first making sure you have enough funds saved away for a rainy day first (ideally 3-6 months of your salary) so this doesn’t stress you out and in turn your investment decisions. Lastly keep it simple by keeping the core part of your investment portfolio diversified and more liquid so in a financial pinch you can still get access to your funds quickly.
Now that we all understand that let’s jump into our weekly Market Insights.
Understanding why West Texas Intermediate (WTI) oil prices went negative last week
You may have heard WTI oil traded at one point at negative US$40.32 last week. The question is how can any investment be negative in price and why?
You may not know but Cushing Oklahoma, in the United States, with a small population of ~7,800 is the delivery and storage capital for West Texas Intermediate (WTI) crude oil futures. When anyone trades WTI oil futures and needs a place to store the barrels of oil physically, they place them in their enormous sized storage tanks in Cushing. Cushing is estimated to have about 80 million barrels of oil storage capacity but recently the U.S. Energy Administration announced that it was about 72% full as of April 10th. The remaining capacity industry experts suggest are already spoken for and said it will essentially be full in May. Coupled this with the coronavirus pandemic whereby demand for oil globally is down over 30% at refineries due to people flying and driving less creates a situation whereby there is nowhere to store the new production of WTI oil. There lies part of the problem.
The other part of the problem lies with how WTI oil is traded. Oil is traded in monthly futures contracts which is different from buying shares of stocks. Such contracts are legal agreements between buyers and sellers, binding them to buy and receive a certain quantity (in barrels) of oil when the contract expires the 20th of each month. As such the May WTI futures contract expired last week on April 20th. As the last few trading days before contract expiration approached, buyers were ‘forced’ to sell their contracts (representing potentially hundreds of thousands of barrels of oil or more) because there were already no storage facilities available even if a buyer chose to take physical delivery. The end result was buyers literally had to ‘pay’ people (hence why future prices went negative) to haul away their physical obligations.
What does this mean going forward? Two things investors should be aware of:
1) This may repeat for upcoming June contracts (expiring May 20th): June WTI crude contracts are currently priced at US$12.48 but did see over a 26.33% drop overnight on Monday. With the storage capacity situation in Cushing unresolved this continues to pose a risk heading into the upcoming contract expiration date to run into similar issues and dragging down financial markets. Luckily last week the impact to overall broad financial markets was not sizable with the MSCI World Index down only 1.48%.
2) Potential economic risks building: What is the result of low and potentially negative WTI oil prices? Potentially more bankruptcies for smaller U.S. oil producers, a spike in job losses and further increase in bond defaults. This is particularly true for high yield (junk) bonds which are predominantly energy-related. As a reference the BAML U.S. High Yield Index is a 2,000 bond index with around 11.7% exposure to energy related companies. In comparison, the energy sector has an approximate 2.8% weighting within the S&P 500 Index. This potentially creates further underlying risks for the U.S. economy and financial markets.
To clarify, at AQUMON currently our clients’ portfolios are invested into energy ETFs but none that are directly exposed to oil like the United States Oil Fund (USO) ETF which is taking the brunt of the oil losses down 38.95% last week. In comparison our client’s energy ETF holdings are fortunately up 1.97% last week due to investors buying up stocks of energy related companies. Furthermore our client’s oil and energy exposure is less than 3% of their portfolios so direct impact will be minimal.
Markets uplifted due to economies re-opening
After surpassing 1 million coronavirus cases (1,010,356 as of Monday) U.S. states like Alaska, Georgia, South Carolina, Tennessee and Texas, are starting to allow restaurants and other establishments to open and gradually serve customers as we can see from the map below:
New York state encompasses 29% of all U.S. coronavirus cases as of Monday at 298,004 cases. New York Governor Andrew Cuomo also announced Sunday he now plans to reopen the state in phases. In Europe Italian Premier Giuseppe Conte laid out a timetable for easing restrictions with plans to also reopen parks, stores and restaurants in stages between May 4th and June 1st. Other European leaders from Spain, France and Greece are also set to announce their plans this week. News of economies reopening continued to drive investor sentiment up but smart investors need to understand this is a delicate balance. For example in the case of the U.S. getting the economy going again also starts with at least rehiring a portion of the 26 million Americans that have applied for unemployment during the past 5 weeks. We are still far away from getting global economies back on track but this is definitely a positive sign.
If you have any questions please don’t hesitate to reach out to us at AQUMON. We’re always happy to help. Thank you again for your continued support for AQUMON, stay safe outside and happy investing!
Ken
About us
As a leading startup in the FinTech space, AQUMON aims to make sophisticated investment advice cost-effective, transparent and accessible to both institutional and retail markets, via the adoptions of scalable technology platforms and automated investment algorithms.
AQUMON’s parent company Magnum Research Limited is licensed with Type 1, 4 and 9 under the Securities and Futures Commission of Hong Kong. In 2017, AQUMON became the first independent Robo Advisor to be accredited by the SFC.
AQUMON’s investors include Alibaba Entrepreneurs Fund, Bank of China International and HKUST.
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