11 March 2019 Issue 799
Global Market Commentary
- US: The US employment report for February was released last week. The number of new jobs in non-agricultural sector was only 20,000, which was far below the expected value. For the entire week, the Dow fell by 2.21% to 25,450.24 points. The S&P 500 index fell by 2.16% to close at 2,743.07. The Nasdaq fell by 2.46% to 7,408.14.
- Europe: The EU central bank postponed the expected rate hike and lowered the euro zone economic forecast for this year drastically . Over the week, the UK’s FTSE 100 index fell by 0.03%, the German DAX index fell by 1.24%, and the French CAC40 index fell by 0.65%. The STOXX 600 index fell by 0.98% for the week to 370.57 points.
- Asia: Harada, Japan central bank’s deliberation committee, claimed that if the economic deterioration makes it difficult to achieve the 2% inflation target, the central bank should relax monetary policy at once. Over the week, the Nikkei 225 index fell by 2.67% to 21,025.56 points. The MSCI Asia Pacific Index fell by 1.87% to 156.10 points.
- US: The European Central Bank has lowered its economic growth forecast drastically and postponed the interest rate hike expectation. The price of European debt and US debt rose while the bond yield dropped. For the whole week, the yield on the US 10-year government bond fell by 12 basis points to 2.634%.
- Europe: The European Central Bank reduced its economic growth forecast drastically and postponed the interest rate hike expectation. The European bond prices increased while the yield dropped. For the whole week, the yield on German 10-year bonds fell by 12 basis points to 0.067%.
- Oil: The tension on the Sino-US trade war have eased and are expected to reach an agreement, market panic on this issue is reduced. Over the week, New York oil futures rose by 0.48 percent to $56.07 a barrel.
- US dollar: The European Central Bank postponed the expected rate hike and significantly reduced the Eurozone economic forecast this year, which benefits the Dollar Index. For the entire week, the Dollar Index rose by 0.807% to 97.306.
- China: The China exports in February fell by 16.6% year-on-year (in terms of renminbi), far below market expectations of an increase of 7.1%, pushing down the renminbi value. For the whole week, the yuan fell by 0.250% against the US dollar at 6.721.
- US: US President Trump clsimed that if the Sino-US trade agreement is reached, the US stock market will increased significantly. Kudlow said that Trump and Xi Jinping will meet in this month or next month and remain optimistic towards the progress of Sino-US trade negotiations.
- U.S: Federal Reserve Chairman Powell said that the interest rate should be maintained at the current level, and the Fed should keep an eye on the overseas’ economic situation.
- U.S: White House economic adviser Kudlow still expects the US economy may have a 3% growth rate in 2019 and beyond. Also, he is looking forward to Trump’s 2020 budget proposal, and has dispelled his concerns about rising US budget deficits .
- U.S: The number of new non-agricultural employment in the United States in February was only 20,000, which is the lowest level within last year. However, the average hourly wage rose by 3.4% year-on-year.
- Euro-zone: Officials of European Central Bank (ECU) officials emphasized that the introduction of new long-term loans and the prospect guidance revision are appropriate responses to the Eurozone economic slowdown.
- Euro-zone: Britain rejects the EU’s latest Brexit proposal, and described it as “disappointing”. Prime Minister Theresa May said that if the parliament rejects her Brexit agreement in this week’s vote, the UK may never leave the EU.
- Euro-zone: The Italian Statistical Office announced that the growth rate of Italy’s domestic industrial producer price index (PPI) slowed down from 5.2% to 4.4% in January.
- Japan: According to the Japanese Cabinet Office’s survey, Japan’s service industry index rose from 45.6 in January to 47.5 in Feburary (after the seasonal adjustment), which is better than the market expectation of 46.2.
- Japan: The Cabinet Office of Japan announced that Japan’s real gross domestic product (GDP) in the fourth quarter of last year was revised up by 0.2 percentage points to 0.5% after seasonal adjustments, which is better than the market expectation.
- South Korea: According to Conference Board data, South Korea’s Leading Economic Index (LEI) in January 2019 rose 0.3% month-on-month to 103.8, the highest level within the last seven months.
|China Market Commentary|
|• Yi Gang, Chinese central bank governor, claimed on last Sunday that there is still some room for lowering the country’s reserve requirement ratio.
• Both the value of China’s new RMB loans and social financing in February were less than expected, and shadow banking system was sluggish, especially the bill financing was shrank significantly compared to last month.
Rebalancing strategy in portfolio management
Rebalancing is an important topic in asset allocation. Rebalancing refers to adjusting portfolio weights to a level similar with that of strategic asset allocation. Rebalancing is needed since portfolio weights may deviate from the original strategic asset allocation ratio over time and new assets may need to be added into the portfolio when bonds matured.
Besides, rebalancing also need to be conducted timely according to investors’ own conditions, including goals, age, etc. This kind of rebalancing is not only track with the strategic asset allocation, but also need to be conducted under the clients’ monitoring.
Why portfolio rebalancing is required
Firstly, rebalancing can avoid investors taking on unanticipated or unplanned risks. Secondly, rebalancing can ensure that portfolio positions are in the most familiar and professional areas of investment managers.
Advantages and disadvantages of rebalancing
In terms of portfolio management, rebalancing brings both benefits and costs. The benefit is rebalancing can adjust investors’ portfolio weights back to the optimal ratio, achieving the goal of maximization of utility. Meanwhile, rebalancing can prevent portfolios deviating from strategic portfolio allocations, avoiding investors bearing on unanticipated losses. However, investors need to be bear in mind that rebalancing involves transactions, and different transaction costs may be generated depending on various financial instruments.
Apart from the benefits and costs of rebalancing, a disciplined rebalancing portfolio may have lower risk while higher potential returns. Empirical studies have shown that as long as transaction costs are low enough, rebalancing can create a diversified portfolio, in which can take advantage of the different asset correlation coefficients to increase potential returns. Also, additional returns can be gained by using derivatives to construct and rebalance portfolios, such as selling the out-of-the-money options.
Common rebalancing strategies
In practice, there is no optimal rebalancing rule. In general, common rebalancing methods include calendar rebalancing, percentage-of-portfolio rebalancing, and constant proportional portfolio insurance (CPPI). Calendar rebalancing works by returning portfolio’s allocations to target weights on a periodic basis. Generally, the monitoring cost of calendar rebalancing is relatively lower than the other methods. However, the portfolio weights may significantly deviate from the strategic asset allocation under the volatile period.
Percentage-of-portfolio rebalancing is similar with the risk-control measures. Rebalancing is needed when the portfolio’s asset ratio exceeds the width of corridor, the portfolio will adjust the weight of the asset. This strategy helps investors manage their portfolio risk.
CPPI is a strategy that may dynamically adjust the proportion of risk assets and risk-adverse assets based on changes in portfolio values. The criteria of this strategy is less clear than the other two methods. Detailed introduction of CPPI would be discussed in the next article.
How to set the optimal width of corridor
Percentage-of-portfolio rebalancing is worth to learn since it helps to manage portfolio risks. “How to determine the width of corridor?” It is a common query of many investors. In theory, there are several factors that might affect the optimal width of corridor, including transaction costs, risk tolerance, correlation of assets within portfolio, and the volatility of assets in portfolio. Investors can take the below table as a reference to develop their own optimal corridor.
Factors affecting the optimal width of corridor
去年12月底，政府公佈《長遠房屋策略》2018年周年進度報告，指2019-20 至 2028-29 年度十年期的房屋供應目標應介乎 42.5萬 至 46.5萬 個單位之間，中點數為 44.5萬 個單位，但官方以四捨五入後的45萬個單位作供應目標…..