Thinking out aloud about portfolio positioning.

So far, not enough has happened. Firstly, lets set our thoughts.

There’s plenty of reasons to have equities in the portfolio.

  • Ex Omicron, good macro backdrop, growth is strong
  • Corporate profits are high
  • Evidence of inflation pass through, so high wages growth not eating margins
  • Equity risk premia is still more or less reasonable

That’s the backdrop to a healthy SAA allocation to equities.

At the same time, there are good reasons to dance close to the door.

  • Omicron may prove to be worse then Delta
  • Market hates uncertainty, doesn’t appear to be priced for it
  • ERP is declining from levels that were “clearly” reasonable
  • Equities a crowded trade
  • Rates may rise, reducing NPV through higher discount rates
  • Tax rate may lift, eating corporate profits

That’s the backdrop for a moderate DAA underweight to shares.

If everything goes well, Omicron fades, BTD will work, and you’ll have dropped a little bit of performance relative to benchmark, but you’ll probably do good enough in absolute terms that you feel okay about the cost of the “portfolio insurance”. It coulda ended badly, so, rainy day and all that.

Back to what we mean by “not enough happening”.

Well, 10 year rates are oscillating between 1-2%, and more granularly, between 1.3-1.7%. It’s not quite enough to be trading the bond portfolio, making sizeable DAA trades.

We feel that at our portfolio level.

And we know our bond managers, who are closer to the market, who are more direct participants in the bond market, who you feel might be able to make some trades at the margin to profit from tight trading ranges, feel that way too, because none of them seem to make much alpha.

Within equities it is the same. We are only handful of percentage points from all time highs. Hardly the time to storm back your underweight, unless you’ve abandoned the above framework.

Likewise, probably not enough to make you feel like you need to capitulate, were you on the other side of the trade, e.g. overweight equities.

And so, not much yet to be done. Not enough has happened.

Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.

This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

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