The Six Park Investment Advisory Committee (IAC) met recently for its regular review of market conditions and asset allocations. This is a valuable part of the service we provide to our clients: the members of our committee have a wealth of experience at national and international levels in the financial markets, throughout many market cycles, and our clients benefit from the unique guidance that Six Park receives from our IAC, especially during volatile and unpredictable times.
At the recent meeting, the IAC recommended that Six Park’s current asset allocations remain unchanged. Despite the fact that, for many people, the past two months have emotionally felt like two years, the IAC has not seen sufficient evidence to suggest a material change to expectations for long-term relative returns and risks among the various defensive and growth assets in our portfolios.
In the past, Six Park has made changes to asset allocations when the IAC has judged such structural shifts in the market, but these conditions have not manifested to date. Examples of such conditions might include signs of a prolonged depression, or the emergence of a long-term inflationary environment.
Naturally, the IAC will continue to monitor global market conditions closely, as they do in the normal course of business.
The IAC discussed several key data points and unknowns that it considers vital to future deliberations, including:
Timing of a vaccine for COVID-19
The development and subsequent testing and release of a vaccine for COVID-19 is of great interest and relevance to the IAC. We still do not know when a vaccine for COVID-19 is likely to be available, and what the economic conditions will be at the time this becomes clear (ie. do we find out about a vaccine in six weeks, six months or six years from now?).
The US recovery and what it means for Australia
Australia looks to be relatively insulated from an “Armageddon” scenario, but data from the US will be very important in assessing the overall global economic landscape. Important indicators will include:
- Signs of social disruption in the US and the potential impact it may have on the ability of the US economy to function normally as the pandemic continues;
- Consumer spending/confidence patterns as the recovery phase emerges;
- Pace of rebound from high unemployment levels and how quickly any early signals of “normal” economic conditions surface; and
- The resolution (or not) of tensions between the US and China and the subsequent impact on global trade recovery.
In Australia, the IAC will be watching the impact of lower immigration levels on the domestic economy – as immigration has tended to support economic activity – but is cautiously optimistic that the negative impact should be contained. The IAC also noted that, absent any unexpected disruptions, domestic fiscal and monetary policy should soften, and therefore shorten, the impact of short-term GDP reduction.
Two questions that need to be answered
There are two fundamental areas of unresolved tension that the IAC is watching closely:
Tension #1: How does one weigh the risk of material economic damage if the virus is not effectively contained against the fact that we are now likely in an “even lower for even longer” interest rate environment? Low interest rates are generally considered positive for risk assets such as shares, and this may be part of the answer for those questioning why and how share markets have recently recovered to some extent. What is more likely to drive markets: fear of economic collapse or the positive impact of low interest rates?
Tension #2: Australia appears to be relatively well positioned to “weather the storm” as COVID-19 containment efforts have been reasonably successful. However, in past times of economic disruption, leadership of global economic recovery came from the US and, as we’ve touched on, the outlook for the US is unclear at this point. So what is more likely to drive local share markets: the relatively good position Australia has in terms of prospective recovery, or the prospect of a bumpy US recovery?
IAC member Mark Nicholson noted: “The US, which traditionally drives the global economy, has struggled to contain the virus and lacks a coherent recovery plan. As the outlook for investment returns will be significantly impacted by the US, we will be watching developments there very closely.”
“Until there is more clarity on the prospective resolution of these two tensions in the market, it is not prudent to be making any changes to portfolio construction, as such moves would be highly speculative at this point,” said IAC chair Brian Watson AO.
Performance of exchange-traded funds (ETFs)
As part of its normal deliberations, the IAC also reviewed the ETF market and Six Park’s selected ETFs.
The IAC noted that ETFs in general, and specifically those used by Six Park, have performed very well during extreme market stress and volatility, in contrast to predictions from some market sectors about how ETFs may perform under pressure. The IAC also remains comfortable with the funds currently used for Six Park’s portfolio construction.
Ensuring the ETFs we use meet our strict quality standards and are “fit for purpose” is an important aspect of the IAC’s role activities. For example, at the most recent meeting, the committee reviewed the composition of IFRA, the ETF we use for exposure to global infrastructure. The committee believes that IFRA’s exposure to utilities will hold it in good stead as markets recover. Additionally, our global listed property ETF (DJRE) has a limited level of exposure to retail (versus commercial) property, which, on balance, we view as a positive in the current environment for this asset class.