A STRONG rally in markets since the lows of June has left some calling the start of a new equities bull market.
But Pendal’s Michael Blayney says it will pay to stay conservative for the rest of 2022 — and watch for better buying opportunities as the inflation outlook matures.
Better-than-expected inflation figures and a benign US earnings season have fuelled a rally over the past few weeks on hopes the pace of interest rate rises might be slowing.
But Blayney, who heads Pendal’s multi-asset investment team, says it pays to be wary of bear-market rallies. A balanced, conservative approach is the best way to ride out the coming months, he says.
“You have to have 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.”
For all the new-found excitement, global markets remain “somewhere between fair and expensive, depending on where you look”, Blayney says.
“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.
“So, we’re not at the point yet where we would want to go overweight equities in portfolios — and infact we’re still a little bit underweight.”
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Blayney says the US earnings season has been more benign than many feared.
“We haven’t yet seen huge pressure on earnings and that’s something that investors need to keep an eye out for.
“If you look at past instances of inflation and monetary tightening, you often see pressure on earnings, particularly if that tightening pushes the economy into recession.”
Investors looking to wade back into markets should watch for signs inflation is coming under control, allowing the US Fed to stay its hand and avoid pushing the economy into recession.
But on the flip side, there is still the risk of a return to falling markets. That could create a buying opportunity.
“If inflation doesn’t subside and the Fed needs to hike more aggressively, that would be one trigger.
“The other is if we start to see pressure on earnings.”
Blayney says the golden rule is to maintain diversification.
“The first thing is we always maintain some bond exposure. If you look through history, in down markets for equities, bonds will give you a positive return 70 per cent of the time.
“We also leave a certain amount of our global shares unhedged which gives us foreign currency exposure.”
Foreign currency exposure creates a useful automatic stabiliser for Australian investors because in times of trouble the Australian dollar tends to get sold off, lifting the value of foreign assets held by a local investor.
“And something that has really helped support our portfolios this year has been alternatives exposure.
“We invest in a range of assets, including listed renewables and other sustainable infrastructure with inflation linked cash flows, as well as commodity-type assets.
“People love to say the 60:40 portfolio is dead, but the reality is that style of balanced portfolio has stood the test of time.”
“So, the message is stay diversified, be a little bit cautious, but be ready for when those buying opportunities do come along if we see something nasty and everyone starts to panic.”
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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