30Jul2020-cover
30Jul2020-cover
5

Liquidity runs dry

The unforeseen pandemic caused the stock market sell-off prompting the US Federal Reserve to pump financial markets with liquidity for the next three months. Resultantly the stock market bounced back. As the Fed’s role in financial markets has moderated recently, what does this imply for the share market investors?

– Chris Demasi

When the stock market sold off dramatically in March this year the US Federal Reserve responded by pumping financial markets with liquidity for the next three months and the stock market rocketed. But the Fed’s role in financial markets has moderated recently and signals that share market investors should proceed with caution.

By the beginning of this year the US Federal Reserve’s total assets hovered around US$4 trillion, after gradually coming down over the past two years. Then the coronavirus pandemic broke and shook health systems, economies, and financial markets worldwide. By the end of March, the Fed had taken unprecedented actions and introduced a slew of programs to keep credit flowing through the financial system, which drove its balance sheet – and the stock market – up quickly.

Over the course of two months in April and May, the Fed’s holding of assets increased to more than US$7 trillion, or more than a third of US GDP. At the same time, the S&P500 index, a measure of the US share market, rebounded from a low of 2,237 on 23rd March to of 3,232 on 8th June, it’s highest level since the coronavirus turmoil began.

US Federal Reserve’s total assets vs S&P500

 

Source: Federal Reserve Bank of St. Louis

Since then, though, the Fed’s buying has subsided, and its balance sheet has come off from its peak. Interestingly, so too has the stock market, with the S&P500 peaking at the same time as the Fed’s assets at the beginning of June. It appears that the stock market is struggling to post further gains without the ongoing support of the Fed. This is particularly concerning as the US quarterly reporting season starts this week and more states and counties resume social restrictions after daily coronavirus case counts accelerated at the weekend.

While we own some wonderful investments ion the Montaka and Montgomery Global Funds, that will provide strong compounding for decades we are also cautious about equities in the nearer term. This means that the funds remain defensively positioned today, with relatively high cash weightings, low equity market exposure, and enhanced capital protections where appropriate, in order to protect investor capital.

Chris Demasi is a Portfolio Manager with Montaka Global Investments.
To learn more about Montaka, please call +612

Our Montaka Active Extension strategy strives for maximised return over the long-term. Owning the Montaka long portfolio typically scaled up to approximately 130 percent - and the Montaka short portfolio typically scaled down to approximately 30 percent – this strategy results in a net market exposure of approximately 100 percent most of the time.

Our Montaka variable net strategy strives for significant downside protection – but with minimal upside reduction. Focused on owning the world’s great and growing businesses when they are undervalued, while managing a portfolio of short positions in businesses that are deteriorating, misperceived, and overvalued, this strategy is our flagship long-short

Our Montgomery Global strategy strives to act as a core, high conviction, global portfolio holding. Consistent with the long portfolios in our Montaka strategies, this offering is focused on owning the world’s high quality, undervalued businesses – and cash when appropriate – to outperform its benchmark. Branded as “Montgomery Global” in Australia to reflect a key.

Our
Strategies

Our Strategies

Our Montaka Active Extension strategy strives for maximised return over the long-term. Owning the Montaka long portfolio typically scaled up to approximately 130 percent - and the Montaka short portfolio typically scaled down to approximately 30 percent – this strategy results in a net market exposure of approximately 100 percent most of the time.

Our Montaka variable net strategy strives for significant downside protection – but with minimal upside reduction. Focused on owning the world’s great and growing businesses when they are undervalued, while managing a portfolio of short positions in businesses that are deteriorating, misperceived, and overvalued, this strategy is our flagship long-short

Our Montgomery Global strategy strives to act as a core, high conviction, global portfolio holding. Consistent with the long portfolios in our Montaka strategies, this offering is focused on owning the world’s high quality, undervalued businesses – and cash when appropriate – to outperform its benchmark. Branded as “Montgomery Global” in Australia to reflect a key.