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.

Parmi les actifs utilisés, actions mises-à-part, les actifs réels sont ceux qui se sont le mieux comportés et c'est d'autant plus vrai ces six derniers mois, avec un gain de 11% pour l'real estate et de 10% pour l'or. Pour ce dernier c'est surtout ce mois de juin qui a été incroyable, grâce notamment au revirement envisagé de politique monétaire de la 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.

Un moyen de contourner ce problème, c'est de passer par des obligations étrangères, par exemple américaines, qui paient des coupons plus intéressants. En ce moment, l'ETF TLT, qui contient uniquement des bons à long terme du trésor américain, octroie un revenu courant de 2.25% (2.49% à maturité). Le risque de change n'est pas un problème puisque lorsque les taux d'intérêt baissent, le dollar s'affaiblit, mais les obligations montent, et vice-versa. Depuis décembre 2003, TLT a par exemple gagné, coupons compris, 145% en CHF, alors que l'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.

Au niveau des actions, on se rend compte que le suivi de tendances (moyennes mobiles) jouent au yo-yo depuis quelques mois, signe qu'une lutte est en cours entre bears et bulls. Pour l'instant ces derniers semblent encore vouloir gagner la partie, mais pour combien de temps encore ? C'est typiquement dans ce genre de situation qu'on peut s'interroger sur la pertinence de ces signaux de tendance, puisqu'ils déclenchent de faux signaux d'achat ou vente en fonction du passage du prix en dessus ou en dessous de la moyenne mobile. Néanmoins les travaux de Meb Faber ont prouvé que sur le long terme cette méthode permet d'obtenir une performance légèrement supérieure au marché, avec une volatility moindre. Ceci confirme aussi mes backtests effectués sur les différents indices boursiers. J'ai constaté par ailleurs qu'en suivant cette approche, les transactions sont gagnantes près de 2/3 des cas. C'est bien, mais ça signifie qu'on doit aussi accepter de se tromper le tiers restant, si l'on veut obtenir une meilleure rentabilité sur la durée, avec une volatilité moindre.

En Suisse et aux USA, la situation demeure encore et toujours en situation de nette surchauffe, avec des tendances orientées fortement à la hausse, en particulier chez nous et des prix déconnectés des fondamentaux, en particulier chez Trump. Les politiques monétaires (taux négatifs en CH et récentes prises de position de la Fed aux USA), ainsi que le protectionnisme américain, couplé à une fiscalité avantageuse, permettent pour l'instant au marché des actions de continuer sur sa lancée, malgré des valorisations de plus en plus intenables. Ces deux régions sont encore et toujours à éviter.

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.