Market and Asset Allocation Update – February 2024

February 2024

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

Market and Asset Class Views

Thoughts

Australian Equities

Noting that we are happy with our longer-term allocation, we see the current market as a little overcooked. China sneezes and we go up! Superficially, we are still seeing strong numbers, but the economy is uneven in its outlook. At the time of writing, the index is at 7650, and is at the upper end of our target 7600/7700 level. We are targeting a top-up at the 7300 level on any prospective pullback. Small Caps remain at the very cheap end. We allocate, but we recognise that we may not be instantly rewarded.

What sort of landing do you believe in? Given the complete failure of forecasts last year, what
do we believe? Well, the story will be in the “long and variable lags”. The whole Covid dynamic has elongated the negative impact of higher rates as both Corporate and Consumers locked in long dated debt when money was cheap. We are seeing some softening emerging in the US Economy and our call is purely a function of the most benign scenario being forecast by the market. So, we ride the momentum wave that is the Magnificent Seven/Six but start allocating more to Small/mid cap stocks and equal weighted vehicles.

With no economic growth, Germany in recession and high real interest rates our confidence in a recessionary call in Europe is much greater. They ECB will be the first to cut rates to remedy this. On every metric the market is cheap, but being a value play with no momentum sees us underweight.

Emerging Markets

What ails China is well known. Debt, Deflation and Demographics. A market PE ratio of 9X is tempting, but…. The remaining wider EM market fundaments are ok. Our call is on balance, neutral.

Property

A bifurcation here as we see the listed REIT space as being cheap as everything got discounted both heavily and quickly. They now offer value. The unlisted space will continue to experience a rolling series of valuation downgrades. Preference is for listed exposure.

Infrastructure

Despite being everyone’s darling, last year was tough for Infrastructure as higher rates caused valuation issues and heavily geared firms faced a much higher interest rate bill. We move to underweight in part due to a lack of catalysts as well as monies better spent elsewhere.

Gold

We have moved to a bigger overweight position as we see more tail winds emerging. A weaker USD (not quite yet), falling Interest rates, Central bank buying, and Geo-political tensions are supportive.

Government Bonds

We continue to be mild overweight on long duration government bonds and see the market as finely balanced with counteracting forces (falling cash rates vs. increased supply etc.). However, as a recession hedge, we main overweight and accumulating positions in sell offs (i.e. 10 years above 4.10%. We see Investment grade credit as being expensive in US, but cheaper here in Aust. However, we prefer to allocate to Gov’ts for duration or to Private Credit for better risk adjusted margins.

Private Credit

The trick with Private Credit is to receive a good yield while keeping credit risk low. So, we don’t want to be overpaying for credit risk. Our rationale is that we see a stronger economy than expected, falling cyclical risk, expected rate cuts and high outright yields. Until we see a variance to these factors, we are happy to be overweight. Yes, we have risk in Private Credit, but we are being paid for it.

Cash

We expect cash and TD rates to remain at this level for longer than what the market expects. It will play its expected role offering an acceptable return for liquidity.

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