The Point

Multi-asset: How to manage portfolios when the world’s in turmoil

It can be hard to focus on the health of our investments knowing that many people are struggling for survival in war zones around the world.

Yet amid global geopolitical uncertainty, our responsibility to our family’s future remains.

In his latest article, Pendal’s head of multi asset Michael Blayney offers some tips for managing investments in times of global turmoil.

A few key points:

• Prepare ahead of time: “The last thing you want is something bad happens and then you realise you’re invested in a way that is outside your risk tolerance.”
• Understand your assets and exposures in detail: “For example, if your bond portfolio is heavily exposed to some emerging markets, you might find it’s not as defensive as you thought it would be coming into one of these events.”
• Consider some home bias: “International diversification has lots of benefits. But this environment may support a bit more Australian equities and a bit more exposure to Aussie bonds.”

Alan Polley: A hard landing is looking less and less likely. Here’s the evidence

Global economic growth remains resilient despite the most significant monetary policy tightening cycle in four decades – diminishing the chances of a hard landing.

That’s what Pendal multi-asset PM Alan Polley sees in his team’s economic cycle model.

“Last year we were concerned the services sector – which was holding everything together – might turn down and join the manufacturing sector in contraction,” says Alan. “It appears that isn’t happening.”

Pendal’s economic cycle model is signalling continued economic growth to start 2024 due to:

• An end to the decline in services activity
• A turnaround in manufacturing activity
• Positive economic surprises
• Economic activity breadth expanding beyond the US to include Europe and emerging markets.

“No one told the US consumer that 550 basis points of interest rate increases is supposed to lead to recession,” says Alan.

Steve Campbell: A straight bat from the RBA

Those looking for near-term rate cuts from the Reserve Bank will be disappointed with the commentary around this week’s no-change decision.

The RBA retains a tightening bias, refusing to rule out a further increase in rates.

“It’s clear the RBA is not comfortable with where inflation currently sits,” says our head of cash strategies Steve Campbell.

“There have been some solid misses and revisions to the RBA’s forecasts in previous quarters that understandably weigh on their confidence.”

The RBA is responding to inflation – a backward-looking view of the economy, Steve says.

If it wasn’t for elevated inflation, the latest RBA monetary statement lays out an argument for easing to occur sooner rather than later, Steve says.

“This is what the market is looking at when it is pricing in the cash rate to be cut in Australia this year – that, and offshore markets that have priced in aggressive policy easing this year in the US, Europe and England.

“However, we still view any back-up in yields as a buying opportunity.

“The US is still likely to start cutting in May, and if it cuts at every meeting after, will hit 4% by the end of year. This would open up potential cuts later in the year for the RBA.”

Michael Blayney: It’s tempting to let it ride, but rebalancing is the smart play

Right now, many investors will be chewing over whether to let high-performing investment settings ride in 2024.

It’s tempting. But Pendal’s head of multi-asset Michael Blayney believes it’s important to rebalance portfolios after a period of strong performance.

“It is very hard to do emotionally, because you’re rewarding the losers and penalising the winners,” Michael says.

“But in the long term, markets do exert a degree of mean-reverting behaviour.

“After a period of strong performance it makes sense to take some profits – and that’s what rebalancing is.

“For an adviser, it’s important to set the long-term strategy with the client. Review regularly – perhaps once a year – and then have active asset allocation.

“If you do nothing else, rebalance because then you will naturally buy low and sell high.”

How Pendal’s head of multi-asset is thinking about equities, bonds and alternatives right now

As 2023 comes to a close there’s a relative calm in markets after several years of volatility in inflation, interest rates and markets.

That means it’s a good time for investors to examine their portfolios, says Pendal’s head of multi-asset Michael Blayney.

Financial markets have shifted to a “more normal” environment in recent months – and investors should think about portfolio allocation in a more traditional way, says Michael.

“Investors should maintain a balanced mix of equities and bonds and some alternatives,” argues Michael.

“In Australian equities you have a market that offers pretty good dividend yields and you get franking.

“We also still really like bonds. There is a yield cushion in case of further volatility.

“Alternatives should still be part of a portfolio, but with bond yields higher investors don’t need as large an exposure to alternatives to generate returns.”

Asset allocation: Why you could do with a little more home bias right now

Have you checked your “home bias” recently?

The term refers to the percentage of a portfolio invested in domestic versus international assets.

For years Australian investors drifted away from a traditional preference for investing at home.

Reasons included greater diversification in geography and sectors, better exposure to tech and lower carbon intensity.

But now those arguments are losing their punch.

“There were good reasons for that shift, but we think it is now done,” says Pendal multi-asset PM Alan Polley.

Alan argues investors should check their home bias “and either keep it as it is and stop drifting – or even marginally go the other way now and increment the home bias up a little bit”.

In a new article Alan explains why it’s time to consider moving back home.

Steve Campbell: No rate cuts – or rises – in 2024?

Aussies were spared further pain this week when the Reserve Bank left the cash rate unchanged at 4.35%.

In its statement, the RBA retained a tightening bias against an uncertain background.

While investors expect rate cuts offshore next year, Pendal’s head of cash strategies Steve Campbell sees our cash rate unchanged in 2024.

Q4 inflation is due out in late January, ahead of the next RBA meeting in February. Steve expects a headline rate of 0.8%, taking annual inflation to 4.2%.

“We can’t see how the RBA can achieve its end-of-year 4.5% forecast – and 0.3% would be a considerable miss.

“Inflation is likely to come down to 3.5% in 2024. But unless we see significant weakness, this will remain too high to warrant a rate cut.

“Though this won’t stop the market periodically pricing rate cuts in – opening opportunities to trade duration with a long bias into early 2024.”