ECONOMIC data out of Australia and many parts of the globe have been very positive for most of the past year, albeit from a low base. Equity markets have responded positively, and markets have run sharply higher.
Wall Street is up close to 40 per cent over the past year. European markets have also improved though not to the same extent. London’s FTSE is up more than 8 per cent. Germany’s DAX and the broad based STOXX Europe 600 are both around 20 per cent higher.
It’s the same story in Asian markets, with Japan’s Nikkei up 30 per cent, and markets in Hong Kong and Shanghai 20 per cent higher than a year ago. The local S&P/ASX-200 is 25 per cent higher.
“The strong growth, particularly in the employment market, has been quite remarkable,” says Michael Blayney (pictured above), head of the Multi-Assets team at Pendal. “But what you are seeing now in equity markets is that most of that good news is priced in. In fact, some are starting to look considerably expensive.”
When allocating capital, Blayney is now looking for more niche opportunities. While there’s been broad-based increases over the past year, there’s less opportunity in doing that going forward.
“We’ve had a handful of assets like Mexican equities, listed property and dividend futures in Europe. We have quite a bit of exposure to small caps as well. They are much more bespoke investments,” Blayney says. “Where our mandate allows, we’ve shifted active risk taking from outright equity exposure – and are now focused on trades linked to the reopening rotation into value opportunities.
“We’ve got this combination of good economics and good momentum. But valuations are getting a bit toppy. At this point in the cycle, we are looking at more bespoke trades and relative value opportunities.”
At this time of the cycle, emerging markets are often nominated as opportunities for asset allocation. But Blayney points out that not all opportunities in emerging markets are the same.
“If you look at China, it’s actually a bit expensive. It’s one of the few markets in the world where we’ve seen downward earnings revisions and that’s a bit unique at the moment. The Chinese economy is weakening to the extent that we may soon see an easing of policy. As a result, we are a little bit more cautious on China.
“Also, there’s structural issues to think about. China has an ageing population. People talk about demographics as benefits of emerging markets, but they aren’t always positive, especially if you look at China and Korea. For example, demographics in China have deteriorated to such an extent that the regime had to abandon its “one child policy” several years ago, which has now been replaced with a “three child policy”.
“Then there’s Taiwan. They have a lot of exposure to semi-conductors, and that’s relevant from a valuation perspective and also a geopolitical perspective. There is a very limited capacity to produce very high-end semi-conductors and Taiwan, in particular, is sitting on this very important strategic asset,” Blayney says.
“Those sorts of geopolitical risks make you think about whether there could be a major conflict between the United States and China over Taiwan,” Blayney says. “It’s that type of tail risk that current ‘priced for perfection’ valuations in many parts of financial markets globally are ignoring”
If you’re investing money in Australia today, the big issue on everyone’s mind is the impact of the delta variant of COVID-19 breaching quarantine and what it means for the local economy and financial markets.
Looking at overseas experiences is a good way of gaining some insight into what to expect.
“We are starting to look at some of the hospitalisation data out of the United Kingdom,” says Michael Blayney, head of the Multi-Assets Investments team at Pendal. “Looking at the rate of hospitalisations and people on ventilators will eventually be more relevant than the number of infections.
“We will need to get to the point where we can treat COVID like the flu. Naturally we will be somewhat more vigilant than we are with the flu, but vaccination is likely to be effective against preventing the most severe cases and that has massive implications for mobility and people’s ability to go out and spend which flows through optimism in financial markets,” Blayney says.
The UK and Israel, which both have high vaccination rates and are experiencing surges in the delta variant of COVID-19, are good case studies, Blayney says.
“If we start to see hospitalisation rates going up, and an escalation in more serious cases, then that will have a very negative impact on risk sentiment, though so far, so good. Conversely getting to herd immunity can provide a significant tailwind to many parts of the market that have lagged due to COVID.”
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 Stuart Eliot and Allan Polley — manages our multi-asset portfolios with a focus on strategic asset allocation, active management and tactical asset allocation.
This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at July 21, 2021. It is not to be published, or otherwise made available to any person other than the party to whom it is provided.
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