Market Watch

Chief Market Strategist Evan Lucas says now is a time to diversify and mitigate risk by reviewing asset allocations.

Actual top -down data is light on the ground this week. There are few key pieces come from the US mainly the core inflation read for March (due Wednesday) and the European Central Bank meeting in Frankfurt on Thursday. Domestically it’s the turn of the ‘confidence’ surveys with:

  • NAB business confidence for March: February produced a confidence number of 9 from 11 in January. Conditions logged a new record of 21 from 18 in January. Key pieces last month were a record in the employment sub-sector, while profitably and trading were near record highs.
  • Westpac consumer confidence for April: Hitting 105.1 in January, the highest read since Q4 2013, consumer confidence has eased to 103 but did log its fourth consecutive month in optimism in March. The optimism is from the past quarter, and in the main is due to future economic conditions, employment and household incomes.   

However, these two pieces of data are not market ‘affecting’, and with this in mind the ‘quieter’ week on the data front actually gives us time to pause and reflect on the current conditions and specifically why diversification and asset allocation should be top of mind.

Main thematics of 2018:

  • Geopolitics – The single largest risk factor facing global markets currently is the White House. Protectionism, tariffs and embargos are now a genuine threat to global trade and economic prosperity.
  • Monetary policy now ‘hawkish’ – The Federal Reserve is forecast to hike its monetary policy up to eight times (approximately 2 per cent) in the coming 24 months. The risk for global equity markets is ‘spill over’ as lower levels of liquidity drain out of investment markets.
  • The ‘Taper tantrums’ of 2013 are a classic example of possible equity reactions to faster, stronger and harder hikes by the world’s largest central bank.
  • Credit markets -  Global credit markets are starting to widen as US denoted LIBOR moves higher due to increases in the Fed Funds rate, mass new issuances of US debt and possible mass repatriation of US dollars due the new tax policies enacted at the end of 2017.  

The flow-on effects have seen short-term interest rates both aboard and here in Australia ratcheting up. In fact, Australia’s short-term money market is now at its highest levels in 2½ years and shows no signs of abating.

These factors have been the mains reasons for the recent spikes in global volatility and are likely to be the causes of further bouts of volatility in the coming year.  

The need to diversify

If the first quarter of 2018 has reminded us of anything, it’s that diversifying your investment portfolio is an imperative. Having your investment portfolio spread over different asset classes allows your overall position to withstand market fluctuations like those seen in the past few months.  

Compare gold’s performance over the past four weeks to that of copper, or even gold to the US 10-year: the inert metal doesn’t give a return but as store of value it has a place.

Look at Australian 10-year bonds over the past four weeks to that of the ASX; despite fixed income risks in the US, Australian bonds have actually seen buying and are providing a good option in the cash and money market section of a portfolio.

If one looks to a sector level, see the outperformance of the Australian REITs compared to the ASX over the same timeframe. REITs are inflation hedged, earnings are stable and in the main removed from international trade issues.  

Diversification across asset classes, sectors and borders acts as a natural hedge to risk events. It will also allow you to smooth out your overall future returns, which should allow financial goals to be achieved in a more timely manner.  


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