Asset Allocation: September quarter re-balance

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
13 July 2020, 9:20 AM
Sectors Covered:
Junior (Emerging) Resources, Bulk Materials

  • Strategic Asset Allocation (SAA) provides a framework within which investors can target an expected return for a given level of risk. It is one of the most important, but one of the most overlooked aspects of wealth management.
  • Morgans approach to SAA applies long term Benchmark allocations per asset class, around which we apply shorter term Tactical Tilts, re-balanced quarterly.

Defensive tilts remain

The 2020 fall in global output will be sharper than in recent recessions as the global economy is now far more interwoven.

With roughly US$5 trillion in stimulus deployed by central governments, debt-to-GDP levels in the world's economy are rising, in many cases comparable to post WWII levels.

As central banks are likely buyers of a significant share of the new debt, this draws obvious funding concerns that will persist well past the health crisis. The role of government is also being rethought as they take a much more active role in the economy (guarantees, wage subsidies, nationalisation) placing the state as a backstop to banks and otherwise solvent firms.

Despite the best efforts of policymakers, a V-shaped recovery is looking more challenging as the effects of the health crisis persist. So the effects of the above appear to be long lasting.

Disinflationary pressures (push toward tech/automation, online driven price transparency) and central bank actions (overt real yield reduction) are likely to keep bond yields low in the near to medium term.

These combine to lend ever more weight to the lower-for-longer interest rates mantra. The road ahead is unusually uncertain, but as we exit the crisis, the hunt for yield will intensify. Investors will again need to seek out less traditional equities and alternative investment-grade income securities to meet their return targets, while noting the risk that entails.

Our Asset Allocation settings remain defensive given the current escalation in unknowns. Note we have re-stated our Tactical Tilts to include an International Equities allocation for the first time.

Select segments of the equities market look challenged for Income in the near term (Banks, Transport Infrastructure). For this reason we have relaxed our negative tilt toward Property to -1% (from -2%) funded from our positive cash tilt which reduces to +5% (from +6%).

The Listed Property segment now offers far more attractive valuations on recent weakness, and offers an appealing source of secure Income in the non-Retail facing segments.

The stunning rebound in the US equity market in the March quarter looks to have run ahead of fundamentals, particularly as the pandemic leaves complex economic questions in its wake.

As such we remain on the look out to allocate more active weight toward beneficiaries of a cyclical recovery, but that looks far too early to call with the information at hand.

View our recommended Asset Allocations

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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