Market and Asset Allocation Update – September 2024

September 2024

“We don’t have to be smarter than the rest – We have to be more disciplined” – Warren Buffet.

Market and Asset Class Views

Thoughts

Australian Equities

A reporting season with enough good hits to satiate the bulls? Takeaway – Corporate discipline remains robust. That’s all fine, but the outlook remains more uncertain with headwinds (soft GDP, defensive consumer, sticky inflation etc). So, with lower growth, mildly expensive valuations and less promising outlook, we move to mild Underweight. Staying U/W on Financials and Resources and Neutral on Industrials. Target for re-entry on the ASX200 is 7550.

Last Quarter we were not strong in conviction in taking money off the table. We are now. A 18.4% YTD return in the S&P500 require some “banking”. Equity markets are juiced by lower inflation and prospects of lower rates. However, this is countered by poor PMIs and housing metrics, deteriorating employment factors and poor consumer confidence. Sectorally, we favour Healthcare, Utilities and Consumer staples and tilt away from Energy and Consumer discretionary. Equal Weight for Large Caps. We downgrade Small Caps allocation but retain a neutral exposure. US “Exceptionalism” may lead to a semipermanent
valuation gap vs. the ROW but for now, “mind the Gap”. Target on the S&P 500 is 5325.

Economically, less robust than the US and with Core CPI at 2.8% further rate cuts are on the way. Cheap, however it’s a lower and slower story with the best value lying with the UK market which is leading the way on most economic indicators. We were Neutral, now underweight.

Emerging Markets

It’s all about China, which continues its struggle to get to 5% growth. It’s all about manufacturing and exports. We remain defensive for the EM call and tip over from Neutral to Underweight.

Property

A rally in listed REIT has brough the bulls out with the “it’s time to buy”. However, impending softer macro factors and rolling lower revaluations will suppress. Hold quality stories. Unlisted opportunities are getting more attractive, but we remain very selective. CRE debt still better priced than CRE Equity.

Infrastructure

Second upgrade in consecutive quarters, buoyed by falling rates and defensive qualities albeit with some correlation to expected softening to listed equity markets. Move to mild Overweight.

Gold

Structurally, we continue to like the story as Central Bank buying, fiat currency factors, Geopolitics and lower interest rates/inflation provide solid long-term support. Tilted 2X on SAA settings.

Government Bonds

Continuing to hold the overweight on government bonds as a defensive ballast for the portfolio. Splitting the curve into 3, we see good value in the short and mid curve and are a milder overweight on the Ultras/Long End (i.e. 30 years in the US). The risk here is that the market is already pricing 200bps in rate cuts. The market now wants a term premium for the long end, so expect a normal curve. We see Investment grade credit as being a reasonable place to park funds (lightening Equities) as a better risk adjusted reward – higher yield bonds have more correlation with equities – Corporate Bonds correlate more with Treasuries/Gov Bonds.

Private Credit

Lots of headlines on the risks, but the sector provides plenty of reward for those who spend time to differentiate their investments. Though some of the credit metrics are softening, this is from historically (Covid funded) levels.

Cash

With falling inflation cash is now generating positive real returns. This is in addition to zero volatility, defensiveness and optionality and immediate liquidity for deployment. Overweight X 2.

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