by Patrick Garrett The Six Park Investment Advisory Committee (IAC) met recently for its regular review of market conditions and asset allocations. There was plenty to discuss given global events and ongoing share market volatility since the last IAC meeting in September. As always, Six Park and our clients benefit from the experience and calm stewardship of our IAC during such unpredictable times.
At the meeting, the IAC recommended that Six Park’s current asset allocations remain unchanged, and they will continue to monitor global market conditions closely, as they do in the normal course of business.
The IAC discussed several key themes and data points, as well as risks and unknowns that it considers important to future deliberations. On balance, the IAC has a positive near-term outlook for markets based on the following key points:
An approved COVID19 vaccine looks likely in the first quarter of 2021
Recent news about the efficacy of several vaccine candidates in late-stage trials is encouraging in stemming the human and economic impact of COVID-19. Recognising that much work remains to obtain regulatory approvals and efficiently distribute the vaccine globally, the progress and level of efficacy in vaccine candidates has exceeded most expectations.
Viewed through the lens of global economies recovering from the devastating impact of lockdowns, this development significantly reduces one of the key unknown risks that had been putting downward pressure on share markets. We do note that the second and third waves of COVID-19 need to be watched carefully, but the vaccine prospects should boost consumer confidence and business investment.
Joseph Biden Jr as the likely next US President has eliminated a market risk
Despite the machinations of President Trump’s contesting of the election, it looks to be mostly theatre and on January 20, 2021, Biden will be sworn in as the 46th US President. This removes a material risk of disruption that would have likely followed in the wake of a Trump re-election. A measure of civil unrest and political gridlock may well surface as Biden takes office, but investors are likely to view this outcome as having stabilised the US government through more predictable policies and a more functional economy.
It is also worth noting that the Republicans are likely to retain control of the Senate, and the combination of a Democrat in the White House and a Republican led Senate is viewed by most professional investors as the optimal outcome from a markets and business perspective, given the “balance” of policy implementation, which has in fact historically been the case for share markets.
Low interest rates for longer support equities
The effective shut-down of most developed economies for varying periods throughout 2020 has had a devastating, although likely temporary, impact on global GDP. Most central banks have dropped rates to historic lows, and signalled that interest rates will remain low for the next several years to assist in an economic recovery. This is a tailwind for share markets for a number of reasons, and should help accelerate the eventual rebound in the US and elsewhere once the vaccine is widely distributed.
Specifically, low interest rates generally support the flow of capital into equities due to the relative risk/reward potential versus more traditional defensive asset classes with low yields.
The Australian economy looks relatively well positioned for a solid rebound
The IAC’s outlook for the Australian economy is positive; while COVID-19 has had a material impact on the local economy, Australia has weathered the storm quite well to date, and appears well positioned to benefit from the broad view that a global recovery is emerging – noting the risks below.
IAC member Lindsay Tanner noted: “These macro themes are quite powerful tailwinds for equities in the near term. As with any point in time, there are always items worth watching that could upend the positive outlook, which we review regularly, but on balance we are optimistic about the recovery from the impact of COVID-19.”
What’s on the IAC’s “watch list”?
As always, the IAC also considers various risks and unknowns that require vigilant review for potential market disruption. Key items that were recently discussed that could alter our current view included:
The pandemic spread intensifies beyond expectations, and soon
We recognise that the US and many parts of Europe are struggling with a growing wave of COVID19 cases, and this remains a risk to the global economy. The risk is somewhat mitigated as treatment of these cases has improved over time, and the arrival of a vaccine would be a further mitigant. Nevertheless, COVID-19 – in particular in the US – remains on the watchlist.
Challenges in the approval or distribution on a vaccine
The approval and distribution of a vaccine won’t happen overnight. However, following on the above point, delays in the approval and distribution of a vaccine would increase the risk of COVID-19 continuing to impact people and the global economy. This in turn could have an adverse impact on the recovery of global economies.
Escalation of China trade tensions
China’s rise as a global economic power has been relatively peaceful, including its leadership in a recent regional free trade deal. However, China has shown periodic tendencies to pursue more aggressive and at times punitive trade policies. We believe that a significant escalation of trade wars is unlikely, but should that occur, the flow-on effect to the global economy could be material. With a Biden Presidency on the horizon, we expect more stability between the world’s two largest economies and thus view this risk as low at this point.
In closing…
As we approach the end of a truly unusual and challenging year, we’re very thankful for the opportunity to help our clients navigate their way through the recent choppy waters. Six Park was designed to be an effective and trustworthy investment management service, led by experienced professionals – and this arguably provides the most value when markets and economic conditions are their most unpredictable.
During such times, the importance of investment diversification, overseen by steady hands, has resonated well with our clients. Our investment returns continue to outperform a vast majority of similar multi-asset class funds, so we have more confidence than ever that our service provides great value for our clients in all market conditions.
Six Park co-founder and chairman of its Investment Advisory Committee Brian Watson AO noted: “Over the past year, the benefit of being invested and well diversified across asset classes has been pronounced. Those who sold out of the markets in February and March have missed out on a significant recovery since then. Timing the markets is too hard even for expert investors, so we’re pleased to have seen clients stick to their long-term investment plans.”