Preparing For the Worst

Weekly Portfolio Update 20170407

As we prepare these comments the news has just come out that the United States has launched cruise missiles at a military airbase in Syria, in response to the horrific chemical weapons attack that occurred this week. This represents a clear escalation of American engagement in the Syrian civil war that has afflicted that country for the last six years. The principal supporters of the Assad regime are Russia and Iran, though at this stage it is too early to gauge what response either country will have. This action comes whilst President Trump is hosting China’s President Xi Jinping in Florida, a meeting which was to consider among other issues how to control North Korea. In an interview this week President Trump made clear the United States was prepared to take unilateral action to curb their nuclear weapons program. As President Trump’s focus shifts from a stalled domestic policy agenda to foreign policy, the consequences of an inexperienced and understaffed administration asserting itself on the world stage comes with attendant risks that are very difficult to quantify at this stage. One thing is certain; it will command our attention.

At lunch time the Australian share market is trading flat for the day, having given up the modest gains added over the morning. We have also seen a response in measures of volatility, however these remain at historically low levels. Elsewhere the Asian markets are mixed with Korea and Taiwan trading down 0.3% and 0.6% respectively, however Japan’s market is trading 0.5% higher.


We mentioned above that the various measures of market volatility have been subdued for some time now, and notwithstanding the intra-day spike on the news above, that remains the case. It is timely to also remember that when we assess an asset class we use a long-term forecast, as whilst sentiment can impact prices in the short term, over longer periods it is the fundamentals that assert themselves. By that we mean the amount of income you receive for owning an investment and how quickly that income is likely to grow over time. By contrast, the valuation that is applied to a particular investment can change in a much shorter time frame, and sometimes by a significant amount. That has not occurred at this stage, but it would be imprudent to not be alert to the possibility. We will use the flexibility of the Individually Managed Account structure, within the guidance provided by your Adviser, to seek opportunities to position your portfolio in quality assets at attractive prices, and will maintain our long-term focus.

• As we do regularly at the start of each month, we have completed buying in the High Interest Cash ETF (AAA).
• We continue to trim our Australian Equities exposure this week selling the Small Companies ETF (MVS).
• Activity outside that mentioned above was targeted at individual portfolios and was largely to ensure that appropriate cash balances are maintained for those accounts that have requested a Quarterly Distribution, which will be paid next week.

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