Market and Asset Allocation Update – May 2024

May 2024

“You can’t control the wind – but you can adjust your sails” – Proverb.

Market and Asset Class Views

Thoughts

Australian Equities

What’s not to like about the Oz Equity market? Not much – it’s just not cheap enough. The index has continued its run with liquidity, lack of bad news, less than tight monetary policy and benign fiscal policy. We would like a good pull back (say 10%+) with an ASX 200 at 7150/7200 as a re-entry point. Tactically, we lighten here (7850) and would reduce further at 7950. Look to Small/mid-caps.

Equity markets in the US have now touched on the “expensive” end of the value spectrum. The Citigroup equity Levkovich sentiment index, touched “euphoria” territory recently. We wind back on the momentum trade that we successfully kept in place for the last quarter. “Bank it” yes – “Underweight”? – not yet – not brave enough. This market also needs a refreshing correction. Continue re-allocating to equal weighted exposures and ex S&P 500 as a preference. Exceptionalism maybe for longer – not forever.

The ECB will be the first to cut rates, but this is a reflection on economic outlook (GDP at 1% vs US 2%+) as much as lower inflation. Every metric vs the US shows value. Cheap – yes, but with better prospects elsewhere. But we are Neutral, so we participate at LT SAA settings.

Emerging Markets

The recently announced China property rescue package is fine, but not enough to make a substantial dent in China’s property woes. We missed the sharp bear market rally (but we were Neutral). Some positives in other EM data releases but not enough to budge off Neutral.

Property

The unlisted space will continue to experience a rolling series of valuation downgrades. Preference is for listed exposure. Unchanged. Higher for longer rates will see rolling NAV adjustments.

Infrastructure

A mixed bag. We like the thematic and the asset class was cheap, Managers are still anticipating 10 yr US treasuries coming back to 3.75% to alleviate exposure to heavily geared assets. Recent softer CPI figures are supportive. Electrification and Greenification trends are also tail winds for assets in this space. Upgrade from Underweight to Neutral but not a high conviction call.

Gold

We continue the hold a bigger overweight position as the current run is not done yet. The East is investing (with focus on the Chinese authorities) and the West is divesting (Retail). It is/will be volatile. We also like Silver (high beta Gold) and Copper (Supply constraints and Greenification) on retracements.

Government Bonds

We continue to hold the mild overweight on long duration government bonds. Best value may be in the mid part of the curve. The long end may not rally as far as people think. If we take the rule of thumb that the pricing mechanism for LT bonds, is either GDP +2.0% or Inflation rate +2.0% = “fair value” range for the 10 yr of 4.25 to 4.75%. We see Investment grade credit as being expensive in the US, but cheaper here in Aust. Spreads are tight on outright yield buying. Therefore, we still prefer to allocate to Gov’ts for duration reward and to Private Credit for a better running yield (blended portfolio return. (barbell)

Private Credit

Again, the trick with Private Credit is to receive a good yield while keeping credit risk low. Overall, a benign environment, despite some increase in defaults in some of the markets’ demographic strata. We remain comfortable in harvesting the complexity and liquidity premia on offer. In Mortgage loans, we step back to a strong to mild overweight as the credit cycle gets longer in the tooth.

Cash

Unless the data diverges significantly, we expect CBs in Aus, UK and US to be locked at the current rates until 2025, also aiming to be small targets in noisy election environments. Love to cut – but they can’t.

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