The Point

Michael Blayney: A quick overview of asset classes right now

How are different asset classes faring in these rough conditions?

Our multi-asset chief Michael Blayney has a quick snapshot which you can read here.

Equities are “getting to the position where there’s some opportunities to buy. But we are not at the point of seeing broad-based bargains yet,” says Michael.

“US large-cap stocks remain expensive, while Australian equities are closer to fair value. Globally, small and mid-cap equities are fair value, or even cheap, relative to large caps.”

Bonds remain attractive because of their defensive characteristics, but still have significant headwinds from inflation. “Where possible, we have a preference for inflation protection and Australian exposure within portfolios.”

Investment-grade credit offers reasonable returns on a medium-term basis, Michael says.

“Higher bond yields have caused REITs to de-rate significantly, moving A-REITs and global REITs back towards fair value.”

Why it’s important to consider ESG in asset allocation

ESG has long been a critical factor in investing, but it’s often considered only at a company level, says Pendal multi-asset portfolio manager Alan Polley.

ESG should be incorporated into portfolios at an asset allocation level, says Alan.

“We know asset allocation is the primary driver of investment returns. It also explains about 90 per cent of the variation of returns in a portfolio.”

Asset allocation fundamentally involves three decisions, he says:

• Changing allocations between existing asset classes
• Changing the definition of existing asset classes
• Introducing new asset classes

Consider the example of climate change, he says. “Emissions intensity is vastly higher in Australia than global markets.

“So, if you think climate change is an important investment consideration, you might tilt away from Australian equities towards international developed markets.”

Michael Blayney: Stay diversified, cautious — and ready

A stockmarket rally has left some calling the start of a new equities bull market.

But investors should stay diversified with exposure to bonds and alternatives, says Pendal’s head of multi-asset Michael Blayney.

“You have to be cautious — when you look at history, you see the strongest rallies in bear markets.

“Inflation has moderated a little bit in the US but it’s still at an uncomfortably high level.”

Global markets remain “somewhere between fair and expensive, depending on where you look”, says Michael.

“Australian equities are probably one of the better-value markets but it’s not a bargain hunter’s paradise out there in any way, shape or form.”

The golden rule is to maintain diversification, he says.

Michael recommends exposure to bonds, foreign currency and alternatives.

Fixed Interest: What’s next for rates and inflation

What’s next after today’s 50bp rates hike

What today’s inflation data means for interest rates

Michael Blayney: How to invest in an inflationary environment

Investors haven’t faced the challenge of investing in a low-growth, high-inflation environment for decades.

But that’s the likely scenario right now, says Pendal head of multi-asset Michael Blayney.

For financial planners, equities mostly sit at the heart of a portfolio and provide long term growth. Now investors must diversify and be nimble to protect portfolios, says Michael.

“Financial planners should think about the things that provide portfolio diversification away from just equities. And that’s bonds, currency and alternatives.

“Unless you have a wonderful crystal ball, you need to own all of them.

“There are assets like commodity futures which have followed the pattern of the early 1970s, though have come off a bit more recently.

“Real assets can be attractive in the listed infrastructure space, where you do get inflation-linked cash flows.”