Mid Cycle DAA Review – Q1 2021

Economic Reflation

In our recent March Quarter 2021 Market and Asset Allocation we moved our Dynamic Asset Allocation (DAA) to underweight for Fixed Income exposure on the view that growth asset classes (equities) provided a better risk/return for the quarter as global economic growth recovered.

This “reflation trade” and our positioning has proven to be correct. The impact of co-ordinated major fiscal and monetary injections is now being seen in the real economy with recent data pointing to better unemployment outcomes in both Australia and the US, and latest retail sales in the US printing a large beat as the December stimulus cheques positively impacted spending (likely more to come in President Biden’s additional $1.9tril stimulus package).

The major consequence of this economic reflation is that Bond markets have been pushing up the longer- term price of money. This steepening in the yield curve has seen the benchmark AU 10 year bond move from 1.0% yield at start of the year to now being at circa 1.60% (highest since early 2019), similarly in the US the 10 year yield has moved from 0.90% to 1.35% over the same time period.

Investor focus in this environment has returned to the outlook for inflation and the resultant bond yield trajectory. Whilst we are still below the RBA’s official inflation target, we have decided to further underweight our exposure to Fixed Income within our model portfolios. We allocate these funds equally to equities (already an overweight position) and cash. The latter giving us available liquidity to deploy when market opportunities appear.

Our next regular Market and Asset Allocation Views for the June quarter will be released on April 1st.

Revised Dynamic Asset Allocation Call:

For further information and guidance, please contact us here.

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