Buying in: 98% Stocks vs. 2% Cash
I bought up emerging market equities last week, including EM heavyweight China.
Last week, I invested my portfolio cash into the emerging markets — Asia, Latam and of course, China.
This means I'm fully invested, as per below chart.
This asset allocation is likely to be mostly permanent. Any trading of short term opportunities will likely take place only on the margin.
Taking out the passive dividend portfolio, this is the composition of the more actively managed equity growth portfolio.
Broadly, the portfolio has a 53% allocation to the US and a 36% allocation to the rest of the world. Half of the latter is allocated to the emerging markets, including China. Gold, a hedge on dedollarization of the emerging world's reserves, takes up 7%.
Based on this asset allocation, which should drive more than 95% of portfolio returns, I am expecting a long term return of 6% to 9% pa. over 10 years.
To raise projected returns, I will have to buy more emerging markets with cash influxes.
This is based on most research models of long term projected returns of different markets, which I may write about later on.
Why did I choose this time to be fully invested?
Reason #1: Analysing May’s Fed meeting, Powell is likely to limit the risk of a crash
In my humble opinion, last week's Fed meeting limits the risk of a crash significantly.
Powell not only stated that a rate hike should be ruled out in the near future, he reiterated the Fed’s inclination to cut rates this year and emphasised the Fed’s dual mandate — not only to curb inflation, but to support growth.
Most importantly, he tapered quantitative tightening, more than halving its rate from US$60 billion a month of balance sheet drawdown to a less aggressive $25 billion a month.
This effectively reduces tight liquidity conditions, and allows for looser financial conditions than in the previous scenario.
Essentially, the signal for monetary easing has begun.
Reason #2: US jobs market strength is finally starting to crack
Last week, a slew of data, from payrolls and layoffs to services PMI all point to what markets have been wishing for — a slowing US jobs market.
Layoffs are rising more than expected, payrolls growth came in much less than expected, and services PMI is cracking.
All of which suggests wage growth will finally de-accelerate.
Which means that markets will get what they are wishing for — a slowdown in the US economy, allowing the Fed to cut rates, and certain asset classes to soar.
Which asset classes benefit from a slowing US economy and Fed rate cuts?
The emerging markets, for one.
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