Market update: Tilting towards a defensive position

Market update: Tilting towards a defensive position

Market update: Tilting towards a defensive position 150 150 Piers Bolger

We’ve just come through a relatively flat February reporting season in Australia. Most of the companies that we invest in had relatively solid results across the board. But when we look to the rest of the year and into 2020, the outlook for earnings growth is moderate.

Looking at the broader market, we’re seeing FY19/20 earnings per share (EPS) growth of about 2.5% to 3%. However, we expect that there will be pockets of higher growth across the IT, healthcare and industrial sectors. In those sectors we expect growth in the vicinity of 7% to 8%. From a portfolio standpoint, we’re relatively comfortable having overweight positions in those parts of the market. At a company level, we also like the global earnings drivers that we’re seeing in those sectors as well. We feel maintaining a global exposure provides not only further diversity to the portfolio, but reduces overall risk.

The banks had a pretty significant rally through February. The banking index was up around 9% – a lot higher than the broader market. But when we look at the expected earnings growth for the banks, it’s below that of the broader market over the next 12 to 18 months, so we haven’t changed our position and remain underweight the sector. Our preferred bank from a portfolio standpoint is Macquarie. We like its diversified nature of its operations and the leverage it has in global markets, particularly around infrastructure and asset management.

After a difficult end to 2018, the rebound of equity markets in January and February was a lot quicker than we expected. March has been more challenging but we’ve seen a significant rally in bond markets. For example, the Australian 10-year bond has declined by roughly 60 basis points over the last three months. That equates to roughly a 2% return for investors that have exposure to portfolios with an allocation of bonds.

From a bond investor’s perspective, we think that there is still value in holding bonds. They provide downside protection for investment portfolios. But equally, we are continuing to see some opportunities in equity markets, although not as strong as we saw through 2017 and the first part of 2018.  Managing to the market cycle (as best we can) has always been a key aspect of our investment process.

The financial market conditions and macro backdrop still remain challenging. The slow down in growth that we saw through the second half of 2018 is still very much with us as we head into 2019. In our view, this is  likely to continue through the second half of this calendar year.

In the first couple of weeks of March, we have also heard the calls by market participants for cuts in official interest rates, both domestically and globally. While we maintain the stance that the RBA will keep rates unchanged, it’s likely that the US Fed will be more patient in regard to further rate rises, while other global central banks (i.e. ECB, BoE)  will remain active in providing economic assistance via monetary policy. As we move forward into the second half of the year, this will have implications for both portfolios and asset allocation.

From an overall asset allocation and portfolio perspective, we still continue to have a broad spread of investments but with a slight tilt towards a more defensive position. We believe this remains  the most appropriate strategy at this stage of the market cycle in order to deliver to our longer term investment and portfolio objectives.

As always, if you have any concerns about your investment portfolios please don’t hesitate to contact your advisor.

Piers Bolger is Chief Investment Officer at Viridian Advisory

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