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A turning point for emerging markets equities is approaching as the drivers of recent weakness rapidly dissipate, believes Pendal’s James Syme.
The end of the US rate cycle is starting to come into view and a newly engaged China is beginning the process of restoring growth, says James, who co-manages Pendal Global Emerging markets Opportunities fund.
That leaves it increasingly likely that stronger returns from EM stocks are imminent, he says.
“The two big drivers of the difficult environment in emerging markets in the last 21 months all seem to be improving,” says James.
“Right now, you don’t want to be too underweight EM and you don’t want to be too underweight China.”
Strategic asset allocation is about setting aside the day-to-day noise and thinking about the long term.
For example, three long-term issues that stand out to our multi-asset team are the build-out of renewable energy infrastructure, persistent higher inflation and geo-political risk.
Weighing up these themes and others has led the team to recently adjust their portfolios.
“We’re increasing our exposure to bonds,” says multi-asset PM Alan Polley. “They’re are offering attractive yields and have material diversification benefits. This will also help defend against a potentially more volatile, long-term outlook.
“We’re also moving some capital into sustainable investment companies. With the secular theme of higher inflation, you want more real assets.
“Net-zero carbon emissions commitments provide a tailwind for renewable energy assets and a hedge to energy inflation.”
A regular portfolio health check is a critical part of successful investing – and doubly so after a volatile 2022.
There are three steps to follow says Alan Polley, a portfolio manager in Pendal’s multi-asset team:
Risk tolerance and long-term goals shouldn’t change after a negative year, says Alan.
“When markets are volatile, your portfolio can stray away from your risk tolerance, and potentially at the wrong time.
“Buying cheaper asset classes at lower prices the ones that have sold off and are giving you the pain – should add to your returns over time.”
This year reminded investors of a few things, says Pendal’s multi-asset chief Michael Blayney.
“The first one is that volatility in financial markets is a normal thing,” says Michael in our latest fast podcast.
“It can obviously cause short-term pain, but it also creates opportunities for investors willing to take a long-term view when value arises.
“Secondly, people had assumed bonds and equities would always move in opposite directions with that negative correlation we’ve seen over the last decade or two.
“But the reality is that correlations and diversification benefits of various asset classes do vary over time.”
Beyond bonds and equities, Michael recommends “meaningful allocations to alternative assets.
“Some of the exposures there – particularly those that have given us a bit more energy-price exposure or some commodity-linked exposures – have actually performed quite well in the last year.”
War, floods and China policy changes pushed this year’s COP27 climate change conference off the front pages.
But there was one thing investors should note, says Pendal Credit ESG analyst Murray Ackman.
COP27’s main achievement was an agreement that bigger polluting countries would compensate developing countries for the effects of climate change.
Some are now calling for this same logic to be applied to companies.
“This has obvious implications for investors,” says Murray.
“If the logic is high emitters bear responsibility for mitigating the impacts of climate change, this adds credit risk.”
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We actively manage investments in Australian and international equities, Australian and international fixed interest, listed property and alternatives.
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