Monthly Asset Allocation Strategies: Overcoming Market Overheating and Optimizing Your Investments

The updated monthly asset allocation table is now available here.

I started this monthly allowance two years ago, following my article on the diversification, with the aim of including in the portfolio asset classes likely to perform relatively well in the event of a stock market crash. These were already overheated at the time. Needless to say, things have not improved today.

Among the assets used, stocks aside, real assets are those that have performed the best and this is even more true over the last six months, with a gain of 11% for real estate and 10% for gold. For the latter, it is especially this month of June that has been incredible, thanks in particular to the planned reversal of monetary policy by the Fed.

Cash, another asset used to protect the portfolio, has weighed on overall performance compared to that of the stock market. It is mainly the proportion of cash that has posed a problem so far, because it has been around 30% on average for many months, even climbing to 50% at one point. These high percentages are due on the one hand to the extreme valuations of certain stock markets, led by the USA and Switzerland, but also to the fact that Swiss bonds have been inaccessible for a long time, due to negative interest rates. However, bonds, particularly those with long maturities, are the number one asset of choice for hedging stocks, since they are inversely correlated to them over the long term, while still offering quite attractive returns.

One way around this problem is to go through foreign bonds, for example American ones, which pay more attractive coupons. At the moment, the TLT ETF, which contains only long-term US Treasury bonds, provides a current income of 2.25% (2.49% at maturity). The exchange rate risk is not a problem since when interest rates fall, the dollar weakens, but bonds rise, and vice versa. Since December 2003, TLT has for example earned, including coupons, 145% in CHF, while the ETF CSBGC0, which groups together the bonds of the confederation with a maturity of 7 to 15 years, has earned only 37%. 145% in a little over 15 years is a very honorable result for an asset supposed to cover shares first. Small bonus: TLT pays a monthly coupon.

I have therefore decided to add a line to my asset allocation, that of long-maturity US Treasury bonds, which complements that of Swiss bonds, for the moment still in cash position. Let us now review all the assets as usual.

In terms of stocks, we realize that trend following (moving averages) has been yo-yoing for several months, a sign that a fight is underway between bears and bulls. For the moment, the latter still seem to want to win the game, but for how much longer? It is typically in this type of situation that we can question the relevance of these trend signals, since they trigger false buy or sell signals depending on whether the price goes above or below the moving average. However, Meb Faber's work has proven that in the long term this method allows for slightly better performance than the market, with lower volatility. This also confirms my backtests carried out on the various stock indices. I have also noted that by following this approach, transactions are winning in almost 2/3 of cases. This is good, but it means that we must also accept being wrong in the remaining third, if we want to obtain better profitability over time, with lower volatility.

In Switzerland and the USA, the situation remains and always in a situation of clear overheating, with trends oriented strongly upwards, in particular in our country and prices disconnected from the fundamentals, in particular with Trump. Monetary policies (negative rates in CH and recent positions taken by the Fed in the USA), as well as American protectionism, coupled with an advantageous tax system, allow for the moment the stock market to continue on its momentum, despite increasingly untenable valuations. These two regions are still and always to be avoided.

Europe, on the other hand, is clearly more interesting, with very reasonable prices and a well-oriented technical trend. I will see in the coming days if we can find some opportunities there. In the United Kingdom, on the other hand, valuations are similar but the momentum remains negative, despite a slight improvement. So avoid it for now.

In Canada, prices are quite high, but not in a bubble situation. The trend is positive and even accelerating. It is difficult to find good moves to play there, but if you find one, it can be worth it. The situation is similar in Australia.

In Japan, my favorite for several months, valuations remain incredibly attractive. However, the trend, despite a slight improvement, remains in negative territory. Here too, it seems to want to play yo-yo, since it was positive not so long ago. I am keeping a close and impatient eye on this market because there are really nuggets that can be picked up by the shovelful. I already have a certain number, but I prefer to wait until the market is well stabilized before investing in it in a more substantial way.

In emerging countries, we have to do as in Japan with securities that are trading at very attractive prices. After moving into a negative trend last month, this market is climbing back into positive territory. It is therefore also playing yo-yo. As mentioned last month, I have nevertheless decided in the future not to invest directly in these securities, due to their exacerbated volatility. I am therefore keeping the securities that I have already acquired for the time being and in the future I will go directly through the IEMS ETF. In any case, this is a relatively small position in the portfolio that I use for diversification purposes.

Let's now come to "real" assets. Gold, as mentioned at the beginning of the article, has soared this past month. Despite a trend that is still accelerating, the valuation of gold remains attractive compared to stocks. We therefore remain invested. For real estate, no change, still invested too, with a target allocation that is climbing very slightly, to 16%, thanks to the weakness that continues on Swiss interest rates.

In terms of long-term bonds, as mentioned above, we remain cash on Swiss securities because of negative rates. On the other hand, a target position of 12% is now set on long-maturity US Treasury bonds. This weighting remains relatively modest for the moment given that US rates are not extraordinary either. It will be likely to move up or down depending on the rates.

Regarding alternative strategies, we remain cash, awaiting a correction of the American indices. It is possible in the future that a short position will be initiated on the S&P 500, if the momentum of the index becomes negative. There is a move to be made given the enormous valuations.

Finally, in terms of cash, we obviously remain invested in CHF for immediately available reserves, but we are switching to USD for medium-term reserves, given the relatively significant drop in the greenback against the Swiss franc over the last month, as well as the rate differential favorable to the dollar.

Have a great summer everyone.