Asset allocation in a shock, after a major rally
A rapid correction on COVID-19 concerns has erased a large part of the global equity rally of the past year, despite the positives of easy monetary policy, the US-China trade deal, the resolution of Brexit and persistent low inflation. Bond yields have fallen sharply to new record lows, whilst industrial commodities and the Australian dollar have weakened. In this note, we provide our regular update of key investment themes, major asset class views and the implications for tactical-dynamic asset allocation.
International Equities: Valuation is back to neutral-to-very attractive levels. Global liquidity conditions are very positive. Beyond COVID-19 disruptions, policy stimulus and easing trade and political uncertainty should lift earnings growth. Investor sentiment is bearish. We add to our overweight in international equities, adding to the US and Emerging Markets.
Australian Equities: Absolute valuation is still above-average, whilst earnings indicators are soft. Liquidity conditions are supported by easy RBA policy. We remain underweight.
Fixed Income: Bonds are extremely expensive in absolute and relative terms. Flat yield curves and negative real rates discount a downturn and very low inflation. Whilst easy policy should keep bonds distorted, risk-reward in most scenarios appears unattractive. We remain underweight.
Property & Infrastructure: Valuations imply extremely low discount rates. Domestic demand is weak. We are underweight, preferring select global infrastructure.
Currency: The AUD faces challenges from record negative rate spreads, weak relative growth, Australia’s high debt and soft commodity prices. We continue to recommend unhedged international exposures.
Investment implications: We remain comfortable with our overweight growth assets versus defensive assets. Looking beyond the COVID-19 correction, we would expect double-digit returns from growth assets and near zero-to-negative returns from defensive assets. As the current volatility eases, we will look for opportunities to increase our exposure to the US and Emerging Markets, trimming cash and bond exposures.