Six Park’s Investment Advisory Committee (IAC) plays a pivotal role in assessing market conditions and reviewing our portfolios regularly.
The IAC recently met to review global market conditions and geopolitical events. As a result of their analysis, they also recommended adjusting the asset allocation parameters of Six Park’s Conservative, Conservative Balanced and Balanced portfolios.
Market Commentary
Markets are going through a volatile period as the world adjusts to more normal interest rate settings after many years of historically low rates.
Volatility has been exacerbated by the Russian invasion of Ukraine, and its effect on energy and other commodity prices. The result is a surge in inflation around the world that’s not been seen for a number of decades.
Economists are viewing the likelihood of recession in most Western economies in 2023 as a near certainty.
Market reaction to all this, not surprisingly, has been to drive down the value of risk assets, especially equities. This means that asset portfolios structured for long term growth have suffered recently.
However, there is a growing body of commentators who believe that the adjustment process may be nearing completion, and that markets could rebound in early 2023.
We do not know if this is correct. But we are very confident that in the medium-term, world economies will work their way through the current cycle, economic growth will revive, and markets will return to their long-term growth path.
Other key points from the recent IAC meeting include:
- In September, the varied performance of our asset classes (positive for Australian shares, emerging markets, global infrastructure and cash yield, and negative for international shares, bonds and global listed property) is evidence of the benefit of spreading one’s investment across growth and defensive asset classes. This can help to moderate risk during times of heightened volatility.
- We can expect heightened market volatility to continue in the near-term.
- Market corrections of 20% or more historically happen every four to five years. Notwithstanding the rapid correction and similarly rapid recovery of global markets at the onset of the pandemic in 2020, the current market correction is not particularly unusual by historic measures. However, this could change, and the IAC is monitoring the situation closely.
- We are in the midst of an almost certain transition to a (relatively) higher interest rate (and therefore higher bond yield) environment.
- Two key items on our “watch list” are:
- The risk that the US Federal Reserve significantly misses the mark in its interest rate policy. It could either raise benchmark interest rates i) too slowly and fail to contain inflation in an orderly manner; or ii) too quickly and potentially cause a more protracted and deeper slowdown of global economic growth. This is a very complex dynamic and will take time to unfold.
- If a recession in the US and other developed economies occurs, the breadth and depth of such a recession is likely to be a key determinant of how markets perform near-term. The interest rate environment and geopolitical events like the war in Ukraine will also influence market performance. We are assessing these risks on an ongoing basis.
- The general strength in recent corporate earnings (particularly in the US) support the prospect that the slowdown of economic growth and inflation could be relatively orderly over time.
Asset Allocation Changes
After careful deliberation, Six Park is adjusting asset allocations to cash yield (AAA) and bonds (IAF) for our Conservative, Conservative Balanced and Balanced portfolios.
For each of those portfolios, we are reducing exposure to cash yield and increasing exposure to bonds.
These changes will be implemented from 1 December 2022.
Why is the IAC recommending these changes?
Recent rising interest rates are the main driver behind the IAC’s recommended reallocation towards bond exposure within the defensive allocations noted above.
Higher bond yields have improved the relative attractiveness of bonds versus the cash yield asset class as a defensive investment and portfolio diversifier.
Note that the IAC only recommends making changes to the risk/reward profile of asset classes based on a medium and long-term outlook, as opposed to reacting to short-term market fluctuations.
In this instance, the IAC’s analysis is that global markets are in the process of a fundamental return to a more historically “normal” interest rate environment versus a recent period of exceptionally low interest rates.
There are no asset allocation adjustments to the Balanced Growth or Aggressive Growth portfolios as they do not have exposure to the cash yield asset class.
This article may contain general financial product information but should not be relied upon or construed as a recommendation of any financial product. This information has been prepared without taking into account your objectives, financial situation or needs.
For further details on our service please see our Financial Services Guide at http://www.sixpark.com.au. Past performance is not a reliable indicator of future performance.