Key Takeaways:

Investors may have to review their portfolios to navigate through the market rotations and challenges from the uncertain Covid-19 situations globally.
The strategies include investing in the large-cap growth sector, diversifying geographically into emerging markets and Europe and alternative investments.
Dollar-cost-averaging into the underperforming sectors may be good when there is good valuation in the market due to cyclical market rotation/correction.

Since the start of 2021, we have seen continued ultra-low interest rates globally, robust economic recovery, elevated inflation expectations, and a peak in both monetary and fiscal policy support that we never see before during the Great Depression in 1929 and the Global Financial Crisis in 2008. S&P 500 and Nasdaq hit their all-time highs multiple times, along with the price hikes of many asset classes such as commodities, cryptocurrencies, bonds, real estate, digital assets, etc.At this juncture, the market is showing some notable challenges and reversion is undergoing swiftly and there is no clear outlook on where the market is heading to. This provokes the nerves of many in the market and induces investors and portfolio managers to review their holdings and reposition their investment portfolios accordingly for the rest of the year and beyond. A ‘Perfect’ Blend: Less dovish Fed, strong economic growth, high inflation but uprising Covid-19 Delta variant and plunge in yield

In June's FOMC meeting, the Federal Reserve has turned less dovish and may set the pace to raise interest rates earlier in 2023 instead of 2024 despite keeping the benchmark short-term borrowing rate at near zero and maintaining the $120 billion asset purchase program. Although the discussion on tapering has started in the Fed's meeting and it can begin reasonably soon before any rate hikes, it still highly depends on the ongoing factors and key data like inflation expectation, unemployment rate and economic conditions.

On inflation, based on the latest inflation data, the consumer price index increased to 5.4% p.a compared to one year ago, recording the biggest jump since the GFC in 2008. The hike is primarily caused by the supply chain disruptions due to Covid-19 and increasing demand from the reopening of economies globally. We deem this elevation in inflation is transitory although it may likely be a long and volatile transition and agree with the Federal Reserve that inflation would adapt when the supply chain bottlenecks normalize and the economies reopen eventually.

The world economy is recovering rapidly thanks to the vast Covid-19 vaccination in the US, Europe, China and other main economies. The U.S. job growth increases month-on-month and the unemployment rate is improving gradually. However, there are challenges from the highly contagious Covid-19 Delta-variant and incoming season changes like the fall returning to the highly-populated North Hemisphere in the next 2 months by the end of September. These could curtail the economy reopening and may cause more localized lockdowns repeatedly.Looking at the bigger picture that the global vaccination rate is rising exponentially, the upset of investors may be reduced. There are some studies to show that the widely-adopted Moderna and Pfizer vaccines are effective against Covid-19 Delta-variant and other mutations. Thus, we would expect the economy to continue growing but likely decelerate as reflected on the recent plunge in the yield of the benchmark US 10-year Treasury note (US10Y).

In the past 4 months, the yield of US10Y plunged 31% from the peak of 1.77% in March 2021 to 1.219% p.a. in July 2021. The market is expecting the economy to decelerate, contrary to the view at the start of this year with the general market consensus of strong economic recovery and high inflation. A lower benchmark yield may help to reduce the overall borrowing costs by companies and individuals and thus continue to support economic growth.Look into large-cap growth sector for long term growth but stay diversified with exposure to value and small-cap sector

In May 2021, we started to observe this market rotation which is still ongoing and carefully monitored. Recently, the value equities which had done extraordinarily well due to the economic recovery, generally have their prices corrected and investors are rotating the funds out and move into the growth sector that were relatively underperformed in the first half of 2021. As a result, the total return ratio of Russell 1000 Growth over Value is hiking sharply, reversing the trend in the first half of this year.

The Russell 2000 Index represents the small-cap companies like Novavax, Sunrun and Plug Power etc. with a median market capitalization of around $1.2b while the Russell 1000 Index represents the big-cap companies like FAANG, Tesla, Nvidia and Microsoft etc. with a median market capitalization of around $15.2b. Based on the chart above, the big-cap companies have outperformed the small-cap companies since May and the trend is probably heading to break through the moving average envelope. Investors can position themselves by carefully investing/adding on the large-cap and growth sectors like FAANG, semiconductor giants and cloud computing sector etc. due to their solid business development and expected earnings growth in the 2nd half of 2021. Although it is still unclear how long this rotation will last, investors can do dollar-cost-averaging in those underperforming value and small-cap sectors or park their funds temporarily into money market funds or inflation-linked bonds to wait for the comeback of these sectors. The reason is we would like to maintain a pro-reflation exposure in our portfolio and diversify into sectors like financials and energy that would benefit when we are moving towards a total reopening of the economy. Long Tech, REITs and Healthcare especially for the long term growth

The Tech sector has rebounded more than 15% since the last correction in March-May and real estate continues its rally by more than 10% since May. In our previous article Inevitable Global Inflation: How to mitigate the impact to your portfolio, investors were suggested to stay invested in the Tech sector and consider taking this opportunity to add stake or invest into the Tech sector. In addition, in June’s REITs article, we recommended investors consider REITs to diversify asset classes in their portfolio. Both of them have done well during this rotation since May and some of our investors have benefited. For the 2nd half of 2021 and beyond, we remain confident in the Tech, Real Estate, and Healthcare sectors, especially in the long term based on fundamental views - expected strong earnings growth in Q3 and Q4 despite economic recovery. The landscape of business and investment has changed substantially due to Covid-19 and digitalisation development accelerates and becomes irreversible. However, there are still challenges subjected to broad market performance/volatility and there is no certainty in market directions and thus our investment returns. Diversify to EM and Europe equities cautiously as regional economic reopening become more popular and U.S. equities turn less attractive in valuation

Since the Covid-19 vaccine discovery by Pfizer and Moderna, equity markets in Europe and some Emerging Markets in Asia have shown a notable recovery. India’s Nifty 50 has outperformed S&P 500 by 7% - 8% since 9 months ago and the rebounce of FTSEurofirst 300 Index is almost on par with the performance of S&P 500 in the same period. They are relatively more attractive in value/price than the stocks in the U.S. due to their lacklustre performance in 2020 and a strong economic recovery and reopening in 2021. However, investors are advised to cautiously diversify their portfolio into Europe and EM equities for better valuation and source of growth as the Covid-19 situation in these regions is still a challenge and some government officials and health experts warn that a 3rd wave is inevitable but much more controllable than the previous given the vaccine rollout. Alternative investment for Accredited Investors: effective tools for portfolio diversification and managementFor accredited investors, naturally, there is a wide range of investment vehicles to consider other than the traditional, volatile and market-driven asset classes. In Kristal.AI, accredited investors can diversify their portfolio with Private Equity/Venture Capital funds, exclusive Private Market and pre-IPO deals, Hedge funds, top managed funds with active investment strategies and value creation, i.e. long/short, arbitrage, tail-risk hedging, life insurance settlement etc. However, investors have to bear in mind that many of these investment vehicles or strategies are considered high risk and we have to do due diligence before investing. It may tailor well to suit your investment objectives, the target rate of returns or risk management strategies and maximize the risk-adjusted returns (Sharpe ratio, Sortino ratio, Calmar ratio etc.) ultimately. Bottom lineThe market in the 2nd half of 2021 may turn out to be more volatile than the 1st half due to elevated inflation, uncertain Covid-19 situation and economic growth deceleration. Investors are recommended to diversify their portfolios with different asset classes, sectors and alternatives and invest for the long term. Dollar-cost-averaging and investing via ETF/top fund remain our favourite strategies especially during market downturns and transitory market corrections. Investors are reminded that ongoing review is highly encouraged to maintain a balanced exposure and probably do portfolio rebalancing when necessary in order to embrace market rotations and volatility. If you would like to discuss portfolio review and investment opportunities, you may contact us and talk to our dedicated Kristal Advisors. Interested investors may also refer to our ETF/Fund Focus List below for investment opportunities and ideas:NameSymbolAsset ClassReturns (1Y)Returns (3Y)Returns (5Y)/Since Inception*Returns (1M)ARK Next Generation Internet ETFARKWEquity-Technology54.91%41.04%48.06%-2.45%ARK Innovation ETFARKKEquity-Diversified57.48%41.19%46.35%-1.93%Vaneck Vectors Semiconductor ETFSMHEquity - Semiconductor62.83%37.02%35.75%-0.03%Global X Lithium & Battery Tech ETFLITCommodity-Equity111.95%35.60%27.73%13.13%Invesco S&P SmallCap Healthcare ETFPSCHEquity-Healthcare58.86%12.66%21.32%-3.66%Blackrock North American Tech-Software ETFIGVEquity-Technology36.87%26.33%29.39%2.43%State Street Healthcare Equipment ETFXHEEquity-Healthcare35.66%15.25%20.30%-2.39%Blackrock S&P 500 Information Technology Sector UCITSIUITEquity-Technology29.52%27.06%29.39%6.34%First Trust Dow Jones Internet Index ETFTFDNEquity-Technology37.03%18.84%26.38%0.95%Blackrock S&P 500 Financials Sector UCITSIUFSEquity-Financials26.95%8.19%15.53%3.03%Blackrock MSCI Global Impact ETFSDGEquity-Diversified32.56%20.61%16.69%-0.22%Global X Copper Miners ETFCOPXCommodities87.50%18.17%18.02%1.98%Vanguard Value ETFVTVEquity-Diversified40.79%12.06%12.60%2.34%Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR)ASHREquity-Emerging Markets15.43%16.31%11.03%0.83%Blackrock Global REIT ETFREETEquity-Real Estate41.33%7.85%4.91%3.35%Pacer Funds Trust-Pacer Benchmark Industrial Real Estate Sector ETFINDSEquity-Real Estate43.21%23.01%0.00%5.75%State Street Dow Jones REIT ETFRWREquity-Real Estate47.74%9.11%5.38%4.90%Blackrock Residential and Multisector Real Estate ETFREZEquity-Real Estate52.73%15.21%9.11%8.04%Vanguard Real Estate ETFVNQEquity-Real Estate40.15%12.77%7.44%2.86%AVM Global Opportunity FundOnly for Accredited Investors11.76%9.55%8.64%0.99%Allianz Thematica - AT(USD) ACCOnly for Accredited Investors42.32%NA24.88%2.61%Future Vision KristalOnly for Accredited Investors58.52%NA32.32%0.87%FengHe Asia FundOnly for Accredited Investors40.00%15.73%15.63%2.28%HASELECT – Waterford LLC Life Settlement fundOnly for Accredited Investors12.97%11.56%14.14%0.00%Kristal Founders FundOnly for Accredited Investors36.09%17.57%22.12%2.22%UOB United SGD FundOnly for Accredited Investors1.97%2.92%1.99%0.12%Ashoka India Opportunities FundOnly for Accredited Investors80.69%NA28.11%1.80%Data is taken on 19 July 2021*The returns of managed funds (only for Accredited Investors) are taken since inception instead of 5Y.

C K Wong

July 21, 2021

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