Positioning ourselves for 2020

Positioning ourselves for 2020

Positioning ourselves for 2020 150 150 Piers Bolger

As we head into the back end of calendar year 2019, we’ve spent a number of months looking at what our asset allocation positioning looks like and how we’re thinking about our positioning into the early part of 2020.

Financial markets have generated solid investment performance this calendar year. So from our perspective, it’s all about where we see both current and prospective risks, the relative valuations across both equity markets and bond markets, and most importantly what investment opportunities are presenting themselves for the back end of this year and into the early part of next year that will drive our portfolio positioning and asset allocation strategy.

When we look at equity markets, the performance has been exceptionally sound. As an example, the local equity market is up ~18% calendar year to date, while global equities are also ~18% (A$ terms, unhedged) . However, valuations have moved higher over the course of 2019 while the earnings outlook has moderated.  That said, we don’t believe that valuations for both domestic and global equities are at extreme levels, so our positioning continues to be a slight overweight to equities with a preference to global over domestic equities albeit we have moderated that position slightly in recent periods.

The opportunity we see in global equities is probably taking a slightly more contrarian view. We’re looking very closely at emerging market equities as well as global small caps and repositioning back to neutral, hopefully into an overweight position into 2020 should we see some further positive momentum in both financial markets and the global economic outlook. If the US dollar continues to push lower through the course of next year (on the back of some level of trade resolution), we think that’ll be positive for both emerging markets as well as global small caps.

On the bond front, we continue to moderate our position. We think bond yields, by and large have tracked as low as they can in this part of the cycle, save for any sort of significant downturn in the global economic outlook. We do believe that the central banks globally have probably pushed (the effectiveness of) monetary policy as far as they can go, but that doesn’t mean that we won’t see further rate cuts both domestically and globally in part, but we do believe that more will need to be done on the fiscal front. To this end  we are seeing increased commentary around modern monetary theory as one possible solution to manage a low interest environment. While the debate is ongoing we ultimately believe that governments will be forced to increase the fiscal spend if low cash rates are insufficient to spur higher levels of economic activity.  So from our perspective, we think bond markets have probably gone as far as they can in the near term. While we still like the defensive nature of bond markets and still expect that in the advent of any equity market sell off bond markets will be the beneficiary, we have moderated our position somewhat given current valuations.

In the other parts of the portfolio, we have been adding to our alternatives exposure throughout the course of this. The allocation has been been broad-based in regards to the underlying strategies, with exposure to global macro, private equity, infrastructure, equity market neutral as part of the overall construct of our alternatives positioning. We do believe that alternatives continue to be a good source of alpha, but equally can provide that downside risk protection in either an equity or bond market sell off.

In positioning for 2020, we continue to maintain a more diversified overall investment strategy. We take the view that this is going to be particularly important in the early part of the year. Further into 2020 the election cycle out of the US is also going to loom large over financial markets, although that’s a topic for another day. From our point of view, it’s all about taking the appropriate amount of risk, but trying to balance that as best we can in regards to diversification and the underlying strategies that can best dampen any volatility across portfolios while delivering to the investment objectives of each portfolio.

As always, if you have any concerns it’s important to talk to your financial advisor.

Piers Bolger is Chief Investment Officer at Viridian Advisory

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