HOW should investors be thinking about asset allocation right now, amid Middle East tension and economic uncertainty?
Pendal’s multi-asset chief Michael Blayney is neutral on bonds and slightly underweight equities.
But in both asset classes there are opportunities in selected markets, he says.
And there are opportunities in real assets such as listed infrastructure and property, Blayney believes.
“We’ve seen weakness in equities, though there has been a small bounce back.
“Bond yields have marched upwards as investors price in the likelihood of higher interest rates for longer – but they now provide good compensation for inflation risk.
“Bonds should also fulfil their traditional role as a safe haven asset in the event that the crisis in the Middle East broadens.”
Blayney says a noticeable feature of the market response to the crisis in the Middle East, is a lack of panic.
“The human toll is tragic, but it hasn’t triggered massive volatility in markets.
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“So far, oil prices have risen but remain below last year’s peak.
“Bonds yields initially fell, but have since risen again. Equities — aside from a modest move down on Wednesday night — have been pretty relaxed.”
Pockets of value are emerging in some bond markets, Blayney says.
“Canadian bonds have started to become quite cheap. Australian and US bonds have also been heading into cheaper territory.
“For investors looking to add defensiveness to a portfolio, current government bond pricing is pretty attractive.”
Blayney’s multi-asset funds are still underweight US equities.
“It’s a very small underweight in our balanced fund. Equities are priced based on a soft-landing scenario in the US.
“Equities will be sensitive to any bad news, and there’s downside risk associated with that.
“Outside the US, valuations on equities aren’t egregious, and even within the US it’s the large caps that are really expensive.
“There are a few markets in Europe which are a bit expensive, but places like the UK and Japan are relatively cheap.”
There are opportunities in real asset classes, Blayney believes.
“Right now you can buy on a 20 to 25 per cent discount to net asset value, things like operating renewables. That gives you quite a bit of margin if discount rates go up.”
Part of the reason for the discount is rising interest rates, but Blayney points out that some of the assets have inflation indexed cash flows.
“In those assets, rising rates haven’t been as bad for net asset values as what otherwise would have been.
“Also, last time we saw a spike in energy prices, assets with a linkage to those prices did well. However there is always a risk of government interference in the market.”
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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