Portfolio Update: August 2024!

August was one of the most tumultuous months of 2024, as the first week saw enormous volatility led by a flash crash in the Japanese equities markets.

As we mentioned a fortnight ago, Mr Market cited the reversal of “carry trade” as the potential reason for the sudden exponential rise in VIX and drawdown in risk assets.

However, leverage and skewed positioning are the sole reasons the FX market exploded with other risk assets.

As we head into the last few months of the year, we remain cautious about the global financial system's environment, as risks are piling up across various economies.

We have been outperforming our benchmark for the last few weeks/months; however, a sudden underperformance of a particular stock earlier this week negatively affected the performance.

Nonetheless, we remain confident about the full-year prospects. We believe that the PF will outperform and generate significant alpha before the end of the year as macro takes centre stage once again in the markets.

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Equities!

Overall equity performance was robust until last week when we had an ugly “accident” in the PF early this week.

Nonetheless, we will recoup the losses in the medium term as we focus on the rigid top-down and bottom-up stock selection process with a sharp reliance on macro developments.

When we discuss equities and their relationship to macro, we gain a lot of clarity on future returns.

Equity market performance in a standard scenario (if we leave the extremes of greed and fear) depends mainly on future earnings.

Thus, digging deeper into what market participants are factoring in for future earnings becomes paramount.

Market participants expect healthy EPS growth for the S&P 500 in the next few quarters, with an expected YOY growth of more than 14% for Q2 25.

If we look at the full-year estimates, markets expect an EPS of $276 for 2025, and thus, the S&P is today sitting at 20.5X Fw PE (276*20.5= 5650).

Now, when we bring macro into the story, we can easily conclude that the rosy expectations have two big issues (except the AI-led deceleration of earnings momentum in big tech that’s coming next year):