Jul 2022: Preserving capital in volatile times

Highlights:

#1
Airo-BOCA composite closed the month of June with -1.22% versus MSCI All Country World Index (ACWI) and S&P500 Index (SPX) at -8.95% and -8.39% respectively. The profit-taking activities in the precious metals & energy sectors impacted Airo-BOCA’s performance in June as the portfolios hold on to these overweighting positions. On a YTD basis as of June, Airo-BOCA composite maintained its positive return at +4.24% versus ACWI & SPX at -20.69% & -20.58% respectively.

#2
The lingering concerns of the U.S macro growth continue where its (i) ISM Manufacturing PMI slowed to 53.0 and (ii) ISM New Orders plunged into contraction mode at 49.2 for the first time since March 2020. Also, Real Personal Consumption Expenditures started to contract by -0.4% again since December 2021.

#3
Given that the U.S Personal Consumption Expenditures price index stays elevated above 6.0% while the Eurozone’s CPI reached a new high at 8.5%, central banks would have to maintain their interest rate hike rhetoric for the coming months. As re-iterated by the U.S Federal Reserve, European Central Bank and Bank of England, an attempt to bring inflation under control remains the top priority.

#4
Consensus is currently still expecting 2022’s earnings growth rate of +20% for the S&P500 index. This expectation could be proven overly optimistic given the global macro growth reversal trajectory. This implies that equity valuation is at risk for further valuation contraction on potential earnings disappointments & downgrades.

#5
Airo will remain nimble with a high level of cash for capital preservation and to be deployed at the right time and price. Tactical hedging shall also continue as an overall strategy to secure potential positive alpha for the portfolios.

 


 

Dear Valued Investors,

Global equity experienced the biggest monthly correction in June on a year-to-date basis as the markets continued to grapple with the prospect of declining growth in the presence of interest rate tightening cycle. Airo-BOCA composite closed the month of June with -1.22% versus MSCI All Country World Index (ACWI) and S&P500 Index (SPX) at -8.95% and -8.39% respectively. The profit-taking activities in the precious metals & energy sectors impacted Airo-BOCA’s performance in June as the portfolios hold on to these overweighting positions. On a YTD basis as of June, Airo-BOCA composite maintained its positive return at +4.24% versus ACWI & SPX at -20.69% & -20.58% respectively.

Table 1: Airo-BOCA YTD Performance As Of June 2022

The lingering concerns of the U.S macro growth continue where its (i) ISM Manufacturing PMI slowed to 53.0 and (ii) ISM New Orders plunged into the contraction mode at 49.2 for the first time since March 2020. Also, Real Personal Consumption Expenditures started to contract by -0.4% again since December 2021. These are important indicators pointing & confirming that the growth cycle reversal should continue to play-out for the coming months. As indicated by the macro growth trajectory, this also means that the U.S corporate earnings growth should continue to taper going forward.

Chart 1: ISM Manufacturing PMI ~ Consistent Decline To New Low On a YTD Basis

Source: Bloomberg, Airo Malaysia

Chart 2: ISM New Orders PMI ~ Plunged Into Contraction Zone For The 1st Time Since March 2020

Source: Bloomberg, Airo Malaysia

Given that the U.S Personal Consumption Expenditures price index stays elevated above 6.0% while the Eurozone’s CPI reached a new high at 8.5%, central banks would have to maintain their interest rate hike rhetoric for the coming months. As re-iterated by the U.S Federal Reserve, European Central Bank and Bank of England, an attempt to bring inflation under control remains the top priority.

Table 2: The Probability of U.S Rate Hikes ~ Another +2.00% Until December 2022

Source: Bloomberg, Airo Malaysia

Table 3: The Probability of ECB Rate Hikes ~ +1.50% Until December 2022

Source: Bloomberg, Airo Malaysia

Consensus is currently still expecting 2022’s earnings growth rate of +20% for the S&P500 index. This expectation, however, could be proven overly optimistic given the global macro growth reversal trajectory. The truth is that sell-side equity analysts are most likely behind the curve and this implies equity valuation is at risk for further valuation contraction on potential earnings disappointments & downgrades.

Chart 3: Consensus Is (Still) Expecting +20% Earnings Growth For S&P500 Index

Source: Alpine Macro, Bloomberg, Airo Malaysia

Airo will remain nimble with a high level of cash for capital preservation and to be deployed at the right time and price. Tactical hedging shall also continue as an overall strategy to secure potential positive alpha for the portfolios.

Jul 4th, 2022
William Yii
CIO, Airo Malaysia