Australia Strategy: Asset Allocation update – Q3 2021

About the author:

Andrew Tang
Author name:
By Andrew Tang
Job title:
Analyst - Equity Strategy
Date posted:
21 June 2021, 5:00 PM
Sectors Covered:
Equity Strategy and Quant

  • Economic data have been strong, and we expect more of the same as economies restart amid pent-up consumer demand and supply shortages. We advocate looking through near-term market volatility and remain pro-risk.
  • Tactically, we stay overweight equities as we expect the global economic restart to re-accelerate and short-term interest rates to be anchored near zero. We tilt toward cyclicality and maintain a bias for quality.

Pent-up demand powers restart

We are at a challenging juncture for markets. Investors are grappling with interpreting solid economic data and the reaction of ultra-accommodative central bank monetary settings.

Over the year US activity looks set to restart strongly, powered by pent-up demand and historically high excess savings. However, unlike the GFC we think the magnitude of the restart may still be underappreciated.

US growth will likely peak over the northern hemisphere summer and the abnormally strong data will be transient: the more activity is restarted now, the less there will be to restart later. There is the potential for the rest of the world to pick up the slack by following the US course of reopening as vaccine rollouts pick up pace but strong growth ‘surprises’ are likely to fade into 2022.

Economic restart to be buffeted by inflation scares

We expect inflation to be volatile in the short term due the impact of COVID on the base comparison year. Bouts of elevated inflation will likely lead to a fall in the value of risk assets. Still, we see any significant pullback as an opportunity to reweight portfolios given our view that inflation concerns will prove transitory (Reflation, not inflation).

More importantly for portfolio positioning is the reaction function of central banks. Thus, any unanticipated changes to the current commitment to keep short-term interest rates anchored will be disruptive for markets. However, we think this risk is overstated as the US Federal Reserve is building credibility in its new framework and has set a high bar to change its easy policy stance, even in the face of higher realised inflation.

Staying moderately pro-risk

The broadening restart – coupled with our belief that this will not translate into rapidly higher interest rates – underpins our pro-risk stance. As a result, we remain overweight equities favouring ex-US exposures, neutral property and infrastructure and underweight fixed interest amid low rates and tight credit spreads. See our asset class views on page 2 for more.

Improving global growth and high structural US fiscal deficits will put downward pressure on the USD and thus a higher AUD (see our recent note). Therefore, to mitigate against short-term risks, we prefer hedged away currency risk.

Key changes to our asset allocation settings

We increase our underweight to cash. With global short interest rates anchored near zero we see the opportunity cost of holding elevated cash levels as a drag on returns. We use this to fund our overweight position in equities.

Find out more

Download full research note

If you would like more information, consider reading Australia Strategy: Global Leaders Update. In this edition, we update our asset allocation settings, outline what the economic restart means for key industries, discuss why bond yield must go up and more.

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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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