Category Archives: Multi-Asset

The end of the cycle is in sight

The pick-up in volatility that began in February continued into March with most major equity markets posting low single digit losses. Australian equities were amongst the worst performers dropping around 4% in local currency terms. All major sectors declined, with the more defensive sectors outperforming. This trend was also reflected in credit markets with credit spreads generally moving wider across the month. Bond yields drifted lower in March, but given the weakness evident in risk assets over the period, the rally was relatively modest. Despite trade war fears and equity weakness the US dollar recovered a touch in March, with the AUD losing ground. GBP also gained ground amid UK Brexit negotiations.

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Trump tariffs and Brexit bring geopolitics into focus

February offered investors a glimpse of what could happen if economic conditions and policy shift slightly on their respective axes. While our returns were not spectacular in February, they were positive against a backdrop of some large falls in equities (while global equities declined around 3.5% during the month, intra-month declines in some markets were in the order of -10%) and wider credit spreads, mainly in the high-yield space. This served as a timely reminder that risk does matter, and certainly from our perspective in managing the strategy, avoiding/mitigating drawdowns is an extremely important objective. While we acknowledge that our returns would have been better in 2017 if we’d held more equities, this is a double-edged sword. More equities are fine on the way up, but punitive on the way down, and, while we’d like to think we can time markets, the reality is we can’t. February showed what can happen.

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Blow-out, or blow-up: Why risk still matters

Despite a frenetic start to 2018, much of the trajectory of markets is as expected and forecasts are unchanged for the medium term. However, with indicators that core inflation is rising — particularly in the key US market — it remains to be seen how policymakers will deal with this issue, and also how it will affect investor perceptions about the prices they pay for assets.

Separately, the sovereign bond markets have had a shaky start to 2018 and while we’ll hold back on saying there’s a start of a bear market on bonds, there are two ways it could go — to blow out, or blow up. A blow out would come as gains accrue in the absence of a market shock, like inflation. A blow up could occur with anything that challenges the fundamental macro and policy support for the market, including a growth shock from China, a pick up in wages or inflation, or central banks being slow to respond to inflation.

The near euphoric sentiment evident in January was a good precursor to February’s re-pricing. The bigger risks though are fundamental, and rising inflation is a legitimate cause for caution.

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Growth, inflation and central bank cocktails

November was on balance another good month for risk assets reflecting an ongoing cocktail of reasonable growth, low(ish) inflation and gun shy central banks. Equity markets gained (with the exception of the UK and Europe) and credit spreads retraced some of their recent modest widening. Also helping performance was a rally in Australian bonds (as the RBA showed little sign of raising rates), a weaker AUD and a rally in GBP as the UK moved closer to an agreement on Brexit.

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Lessons learnt since 1987

The first is that this job is hard. While it’s easy to look back and identify what you should have done, it’s much harder to make decisions in real time, looking forward into a future that is in large part unknowable. While technology means we can now process more data better and faster (and as a result have better back tests) it doesn’t change the fact that the future is inherently difficult to predict. Being wise in hindsight is popular but unhelpful.
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