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“IF I’M AN ADVISER, and clients are walking in asking about the headlines saying the market is down, and I’ve got to show them losses in their equity and bond allocations, there’s a few things I need to explain,” says Michael Blayney, who heads up Pendal’s multi-asset investment team.
“The first is the context of the recent fall in equity markets. Second, I need to talk about relative valuations. And finally clients need to know there’s very different behaviour going on compared to March 2020, at the beginning of the pandemic.”
Equity markets around the global have fallen sharply in recent weeks. In the week ending January 21, the five-day drop in the S&P500 was the largest since March 2020 — the beginning of the pandemic. In Australia it was the biggest weekly fall since October.
“Investors must keep in mind the broader context,” Blayney says. “It’s been a very strong period for equities, and Wall Street has only fallen back to levels of August last year.
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“If you think of it in terms of the long bull market we’ve been in, that’s more of a pull-back. And it’s to be expected.
“The other thing that’s happening is bond yields are rising. So, if you buy bonds to protect your portfolio, then in the short term that hasn’t been working.”
The common factor for both bonds and equities over the past two years has been liquidity, Blayney says. But with inflation rising and interest rates in the US set to increase, the era of easy money is coming to an end.
“As we move to a more normal environment, there will be more volatility because ultimately, easy money tends to suppress volatility.
When it comes to relative valuations, Blayney says last year his team was more bullish and happier to take on riskier assets.
“Now we are just a little more cautious. As the bull market has matured, more and more markets have crossed through fair value, and US large cap equities look particularly expensive.”
Blayney also points out that January 2022 looks very different to March 2020, at the beginning of the pandemic. This time around, investors are selling off some of the high growth, popular stocks, particularly tech companies.
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“In a relative sense, you are seeing value stocks doing much better,” Blayney says. “Also, some of the frothiness around high-risk assets – notably crypto-currencies – has started to come out of the market.”
While all equity markets tend to rise and fall together, over three to five years disparities in cumulative performance between different regions and styles become evident, making diversification within growth assets very valuable to longer term investors.
Blayney says it’s time to look at reducing exposure to assets which have become overly expensive and using the opportunity presented by the current pull-back to buy things that are a bit cheaper.
“For example, we like Japanese and UK equities at the moment and value-style stocks. They are reasonable value.
“In terms of bonds, while we are underweight, we are more cautious on markets away from Australia. For example, in the shorter term, the US Federal Reserve will have to tighten more than the Reserve Bank of Australia because the US has more of an inflation problem.
“So, we prefer Australian bonds to most global bonds.”
Michael Blayney leads Pendal’s multi-asset team. Michael has more than 20 years of investment management and consulting experience. He was previously Head of Investment Strategy at First State Super and head of Diversified Strategies at Perpetual.
Pendal’s diversified funds provide investors with a variety of traditional and alternative asset classes and strategies.
The team — which also includes Allan Polley — manages our multi-asset portfolios with a focus on strategic asset allocation, active management and tactical asset allocation.
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This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at December 8, 2021. PFSL is the responsible entity and issuer of units in the Pendal Multi-Asset Target Return Fund (Fund) ARSN: 623 987 968. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com