May Market Update: A Tale of Two Halves
Financial markets again moved higher during May with all major asset classes generating positive returns. However, it was very much a tale of two halves with a significant dip in equity markets during the middle part of the month, offset by a late month end rally in both equity and bond markets.
So, what was the issue that drove financial markets in the first half of May? It was all about inflationary expectations.
Markets have been concerned about the risk of rising inflation and what it means for central bank policy. We’ve seen this trend across a number of commodity markets including Lumber, Copper and Nickel which have each reached all-time highs. While each of these commodities have experienced a sharp increase in demand, we believe the extent of the recent upward movement in prices reflects the near-term supply-side challenges facing the global economy as it reopens and demand for certain commodities increases. Another good example of this is semiconductor chips which are facing a significant global shortage, which is pushing process higher. Despite these concerns, we believe that inflationary expectations are likely to flatten out as we move through the second half of this year.
While we do expect (CPI) prints to be higher over the next 3-4 months, once those supply chains bottlenecks start to ease, we expect that inflationary pressures should start to moderate through the back end of this year into 2022.
There’s a lot of positive elements associated with some of the data signs we’re continuing to see both domestically and globally. Domestic GDP has been lot stronger, and employment growth has continued on that upward trajectory, albeit a little patchy since the Job Keeper payment has finished up.
The speed and the rollout of the vaccine has also helped and has been instrumental in the reopening of both the domestic and global economies.
In the context of portfolio positioning, we have not made too many changes over the course of the month.
We continue to focus on some of those key themes, building into that cyclical led economic recovery across both our Australian equity and our Multi Asset Portfolios. In our view this will ultimately drive performance through the second half this year and we feel very comfortable in the context of our current portfolio positions.
That said, we have built some level of inflation protection into our portfolios should inflationary expectations do get ahead of us. But we certainly aren’t planning for that to occur over the next 12 months or so.
We also continue to be underweight in our bond exposure as we prefer to play that through growth assets such as equities or growth alternatives. To this extent, we’ve also included some real asset exposure in property and infrastructure that creates additional diversity within the portfolios.
As always, if you have any concerns about the portfolios, please feel free to reach out to anyone in the team and we look forward to catching up again soon.
Piers Bolger is Chief Investment Officer at Viridian Advisory.
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