It has been a very interesting time in financial markets this past month. There are three challenges, in particular that we’re seeing at the moment – the ongoing trade dispute between the US and China, how the Federal Reserve is reacting to the trade dispute and the Reserve Bank’s decision to cut interest rates (in May).
Looking at the relationship between the US and China, it’s clearly not showing any sign of improvement. From a trade perspective, we believe that this will materially impact corporate earnings and overall growth globally should it continue to worsen. These two countries represent 40% of global GDP and we’ve already seen slower economic growth globally, so any further increase in the trade dispute will only be a negative for the growth outlook.
The US Federal Reserve has been in the news recently and it’s likely that they will cut rates in the second half of this year on the back of a moderating growth outlook. This is quite a different scenario to 12 months ago, when the Federal Reserve was saying that the neutral rate was a lot higher than it is today.
On the domestic front, the recent move by the RBA to cut rates to an all-time low of one quarter per cent (1.25%), is flowing through into our portfolios on the back of an increased allocation to fixed income. In our opinion, the RBA won’t stop at one rate cut and we can expect to see another reduction of at least (0.25%) 25 basis points, potentially as early as July.
When we think about this in the context of our portfolios, we’ve been reducing our cash allocation as we don’t see a lot of value in in cash at the moment. We’ve also been adding to our fixed income allocation, and while bond yields have fallen to near all-time lows, we still believe there is further value (via duration positioning) in the sector. Equally, we’ve also been selectively adding to our equity positions. Despite some moderation in corporate earnings, EPS growth remains positive and with discount rates declining this remains somewhat supportive of equity markets.
Overall, we’ve been focusing on delivering a more balanced, neutral investment portfolio to cover the shocks we’ve seen in financial markets over the last couple of months. This has enabled us to better position the portfolio to allow for a more balanced investment return profile (across both defensive and growth assets) which we think will potentially come through over the coming months.
As always, it’s important that you discuss your individual strategy with your advisor if you have any concerns about your portfolio.
Piers Bolger is Chief Investment Officer at Viridian Advisory
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