Market Update from Our Investment Team

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We recently recorded a video with Chris Lioutas and our own Tim Luxton to discuss some of our views on the current market situation, and address some questions that have been raised by our clients and from what we have heard externally.

We have included a comprehensive summary further below as we hope to provide some insight on these questions:

Why are some leading indicators negative and is there a cause for concern?

  • When will things turn?
  • Moving to Term Deposits?
  • Equities and Bonds – What’s the view?
  • Markets vs Economy – why do they sometimes perform differently?
  • Key messages for people at this stage?
  • What’s the course of action?

Why are some leading indicators negative and is there a cause for concern?

Some of the leading indicators coming through have been negative, however, this is not surprising and certainly expected – because of high rates of inflation, central banks have been increasing interest rates quickly to try and control inflation – they’re trying to reduce ‘demand’.

Central banks can probably choose a couple of approaches to control inflation. In the past we have seen them sometimes drip these measures across a longer period of time, but we’re seeing this time they’ve chosen the ‘rip the band-aid off’ approach. Which does cause more initial concern, but the benefit is that we understand what ‘we’re dealing with’.

When will things turn?

We are coming into this period from a position of strength – economic activity prior to this was strong (GDP, unemployment, other parts of economy doing well), whereas in previous situations like this, we’ve come in from a weaker position.

When will the dynamics change? How far are we through it? – We are fair way through it already, while certainly not at the end yet, we are likely through the most of it. Central banks have indicated the possibility of a couple more increases to come but they are likely to ‘pause’ during the end of the year to review the impact as economic data comes in.

Moving to Term Deposits?

Usually as a capital preservation strategy if your time horizon has shortened perhaps, or want to take some risk off and ‘feel more comfortable’. However, investors need to understand doing so will crystalise losses and potentially miss the resulting market rally. It may not be a bad idea for some personal circumstances but it’s useful to understand the view on the equities and bonds market too.

Equities and Bonds – What’s the view?

A year ago, equities and bonds did look somewhat attractive, but they look significantly more attractive now. While emotionally, when things fall, you feel like you want to get out, but valuations actually improve. Hence returns from the bonds and equities sides of the portfolio, from a three year view actually look really healthy.

We’re buying into equities now at really attractive valuations – some are cheapest in 4-5 years and with bonds, we’re seeing yields we have not seen in almost 10 years.

Markets vs Economy – why do they sometimes perform differently?

Economic growth is conducive to the long-term performance of equities and other asset classes, but short-term economic movements don’t really impact markets as much because markets are forward-looking. A lot of times markets would already ‘price in’ the negative data. There are self-correcting mechanisms in markets where economic environments can be improved in the short term and asset prices do reflect them quickly. So when the market starts to see some less negative news, the market will start to react ahead of time. Hence, it’s useful to separate the economic performance from the market outcomes.

Key messages.

Some investors might have some familiarity going through similar phases (GFC, European crisis etc..) and it’s useful to look at three key factors /parts:

1.       Strong buffer

We are going into this from a position of strength, so there is a fairly large buffer, and should provide some source of confidence.

2.       Good time for opportunities

Coming to the back-end of this, some attractive opportunities have presented which outweigh the risks from a medium to long-term perspective.

A lot of fund managers have been proactive and forward-thinking in repositioning or making changes to their portfolios to take advantage of these opportunities.

3.       Markets are used to dealing with risks

While there is a confluence of events, yet nothing really ‘new’ in any of them, and we’re not often dealing with most of them at the same time, what history has showed us is that medium to longer-term focus has been ideal.

What’s the course of action?

We can’t avoid some risks in the short term however, because of the position of strength as mentioned and the opportunities in this stage of the cycle (now seeing valuations from an opportunity perspective rather than a risk perspective), the best course of action is to ‘stay the course’ while ensuring your portfolio is closely monitored, and to be ready to act if needed.

Subtle changes ‘around the edges’ to take advantage of opportunities or to de-risk is sensible, but big changes like moving to cash has historically proven to be the wrong call. We continue to make sure we’re longer-term focus and that the underlying investments in the portfolio doing what we expect them to.

And as always, we’re just an email or phone call away and would be more than happy to address any of you questions or concerns.

For our Perth based clients, join us at our seminar for some more insight!

With our best regards,

Financial Framework

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