The head of Commonwealth Private Banking, Marianne Perkovic, takes a look at the some of the key domestic and global trends for private investors.
Many business people and professionals are self-directed investors, often without the time and support to help them with their long term personal investment goals.
But dedicated support with deep investment markets insights and tailored solutions can take the pressure off busy professionals and business people to get the right balance on both business and personal objectives.
And that is especially true at a time of volatility across many markets and asset classes, and as global forces and events continue to cause uncertainty in an increasingly interconnected world.
Twelve months after the UK’s shock Brexit decision and six months into the Trump presidency, many questions remain about the future direction of the global economy. This is especially so for investors looking to navigate volatile global markets and create a sustainable financial strategy for the long term.
In the UK, inflation has edged higher and real incomes are weaker, with no end to the trade negotiations in sight. Yet the FTSE has stayed buoyant, gaining 14.8 per cent over the year to 14 July 2017.
In the US, equity markets have surged to record highs, spurred by the much-discussed ‘Trump bump’. But our newsfeeds remain full of political and economic uncertainty, fuelled by claims and counterclaims.
All this points to a larger challenge: in a world with a 24/7 news cycle, how do you cut through the short-term noise to identify the underlying trends shaping markets now and into the future? Here are some ideas from Commonwealth Private’s Investment and Advisory Services team.
Strategic versus dynamic asset allocation
The first and most obvious question to ask when exploring future market trends is: over what time scale? This is where it’s important to distinguish between strategic and dynamic asset allocation.
Your strategic asset allocation is the broad asset mix best suited to help you achieve your investment goals over the longer term. It’s reflected by a risk–return profile appropriately matched to your age, investment timeframe and risk appetite. Think of it as your investment baseline.
In contrast, dynamic asset allocation is a technique for exploiting short-term market trends and avoiding emerging risks. This is done by temporarily diverging from that baseline and dialling asset classes up or down to capture value. So, while a balanced investor might have a long-term allocation of 25 per cent of their capital to Australian equities over the economic cycle, they might also choose a short-term dynamic allocation of 19.5 per cent, while waiting for better value to appear.
This combination of long-term strategy and short-term dynamic allocation has become increasingly rewarding in a low-return environment where attractive investment opportunities are hard to find.
International equities: still unrealised potential
The positive news for investors is that our analysts believe international markets have further potential to offer. However, they also warn that it’s important to be selective. In particular, we’re currently overweight in US equities, despite their recent stellar gains.
At the moment we’re seeing stronger US economic activity that will continue to drive revenue, even with the potential for higher interest rates. But there are also good reasons for keeping any dynamic allocation to US stocks within careful bounds.
US stocks have become relatively expensive of late, while bond markets are signalling that investors aren’t expecting any significant stimulus from tax cuts or new infrastructure spending in the near future. For that reason, we suggest only a relatively modest reweighting.
Our analysts are less positive about UK and Eurozone sharemarkets, which are facing a number of headwinds. We’re also underweight in emerging markets, with our analysts viewing China as vulnerable to a rising exchange rate, high debt levels and weak commodity prices.
Australian equities: fair value or overvalued?
The Australian sharemarket is at an interesting point. Despite a run of stronger economic data, it has recorded only modest gains this year, remaining well below recent highs. However, we remain underweight in Australian large cap equities, at least for the moment.
We’ve long believed that commodity prices would undo recent price gains to return to their lows. Now that scenario is being played out, with iron ore declining from almost $100/tn to less than $60/tn, while coal, oil and other commodities are also down. With little relief in sight, lower prices will continue to weigh on the resources sector.
Meanwhile, financial stocks, which make up 37 per cent of the market, are set to be impacted by state and federal levies, as well as regulations designed to rein in interest-only lending.
As a result, Australian shares look relatively expensive when we compare current prices to projected earnings and earnings growth. For that reason, our target dynamic asset allocation is underweight in Australian financial, retail and resource stocks, while overweight in healthcare, utilities, telecommunications and technology.
For insights and investment ideas such as these, see Commonwealth Private’s latest Quarterly Investment Strategy Report which you can download here.
