This is an update on the recent market volatility and changes made to the portfolios during the February 2022 rebalance.

Market update

It’s been a volatile start to the year for financial markets (but not too surprising nor out of line with history or our own expectations) with changing and rising expectations of interest rate hikes. Inflation has been increasing and is high especially in the U.S. The U.S. Federal Reserve is expected to raise interest rates in March 2022 for the first time since the pandemic started in early-2020. We have seen almost two years of ultra-accommodative ‘crisis time’ monetary policy. The initial interest rate hikes can be seen as a natural progression resulting from the transition towards reopening.

Portfolio update

The managed portfolios have outperformed their benchmarks during 2022 as expensive high growth technology stocks have pulled back. The plan is to wait patiently for slightly deeper selloffs to add back into shares after previously reducing equity exposures (around mid-2021) ahead of this anticipated volatility. The S&P 500 has seen 10-15% equity market reversals frequently (according to Bloomberg, nearly once every two years over the last 70 years) and the start of interest rate hikes is a common catalyst for these reversals.

Following this market reversal, our positive view on share markets relative to cash and bonds remains, due to our expansionary view of the economy cycle. However, there are specific areas of the share market that may continue to struggle if interest rates rise faster than expected. These areas are very expensive and tend to rely on high growth expectations to support high valuations. The portfolios have been positioned and continue to prefer shares with lower valuations and are more cyclical in nature (to benefit from the expanding economy). This has been our position for more than a year and the portfolios continue to benefit from these exposures.

Below is a summary of the changes to your portfolio in February 2022:

  • Australian direct shares semi-annual rebalance
  • Reduced banks and insurance stocks;
  • Bought metals and mining, industrials and real estate stocks;
  • Materials and real estate now the largest overweight sector (previously financials), while staples and healthcare the largest underweight sectors;
  • New positions in Carsales.com, Lynas, IDP Education, Wisetech, Pilbara Minerals; and
  • Sold Amcor, Woodside, Coles, Orica, Xero.
  • Increased Australian dollar hedging (looking for upside in the Australian dollar)
  • Increased Australian dollar hedging from approximately 15% to 25% by selling unhedged share currency global equity strategies and buying Australian dollar hedged global equity strategies. This reduces the potential currency losses faced if the Australian dollar rebounds from low-70 cents to 80 cents. This could happen as the global economy continues to expand and the more cyclical Australian dollar outperforms.

 

Finally, it’s important for us to be patient before redeploying more capital into share markets. This interest rate ‘lift off’ narrative is going to take some time to digest, as higher inflation could continue to persist over coming months. Timing on the first-rate hike by the U.S. Federal Reserve (expected in mid-March 2022) and the messaging accompanying the interest rate hike will be crucial too.

Equity markets have reversed. Again, it’s been in specific areas, and this has so far been in line with expectations. More short-term volatility is possible, but further upside strength in share markets over the medium-term is likely. This volatility is part of the transition from crisis to recovery to expansion. This is why a dynamic asset allocation, and a patient approach, is vital to take advantage of market opportunities whilst minimising risks.