Portfolio update January 2022

We’ve long been positioning our portfolios in cheaper value-oriented exposures due to extremely high valuations in growth stocks, and also underweight bonds given very low interest rates.

This held us in good stead during January, as increases in interest rate expectations caused substantial falls in high priced assets across growth and defensive exposures. The video below explains more, or read the full commentary below.

January 2022

Multi-asset market update

January was a difficult month for all major asset classes, with international and Australian equities, property and bonds all falling during the month. Markets priced in more interest rate rises in the face of continued inflation and more hawkish commentary from central banks. Within equities the most expensive growth stocks and higher quality companies bore the brunt of the selling, while more reasonably priced value stocks fell much less.

Our defensive positioning added value, as did our focus on investments with reasonable valuation. Energy exposures in particular added value, as equity investors recognised the high earnings potential of these companies at current oil prices despite the overall negative sentiment.

Multi-asset portfolio update

The growth outlook remains robust, but the increasing likelihood of higher interest rates as central banks seek to end extraordinarily accommodative interest rate policies and the high premium attached to high quality growth assets means we remain underweight equities and fixed interest, and continue to favour value equities and less expensive sectors over high priced technology stocks. 

The strong returns in investment markets mean that even with the defensive tilt our portfolio is comfortably above its strategic return target.

Equities market update

The Australian equity market fell in January as negative sentiment linked to inflation and higher interest rates drove valuations lower. Most affected were stocks with strong secular growth stories and high valuations, such as technology and health care companies. Oil and gas names and iron ore stocks bucked the trend of the broader market to rise over the month, as commodity prices continued to increase.

Our portfolio outperformed significantly over the month, with both sector allocation (mainly avoiding expensive growth sectors and being overweight energy) and selection of more reasonably priced stocks within sectors adding value. As a result, the portfolio was insulated from most of the fall the broader market.

Equities portfolio update

We continue to be negative on the outlook for bank lending as interest rates are likely to rise as the RBA moves to end its extraordinarily accommodative interest rate positions. We also favour low cost producers of commodities that offer good value.

Given the extreme value dispersion in the market we have lower exposures to high quality growth companies than the historical average of our strategy. If their share prices continue to fall and their valuations become more moderate, we would expect to rebalance the portfolio back into these higher quality companies.

Concentrated Absolute Return portfolio update

The portfolio fell in January, albeit about half as much as the broader market, as inflation and interest rate rises weighed on equity markets around the world.  

The portfolio is focussed on companies that are trading at depressed valuations following COVID and which should do well when the equity market recognises that earnings have normalised.

The portfolio’s largest sector allocation is to industrials in a series of discounted companies that will do well if their earnings return to pre-COVID levels. Within the materials sector we have positions in select companies outside of iron ore and coal, whose prices we feel are unsustainable. The portfolio’s largest positions are in TPG and Ramsay Health Care, both of which are quality companies that are trading at deep discounts to historical valuations.

The portfolio has no holdings in the Australian banks, which are trading on elevated multiples of high earnings stoked by an unsustainable growth in mortgage lending, and no direct exposure to iron ore.

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.

General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement (PDS) or Investor Directed Portfolio Service Guide (IDPS Guide) and consider talking to a financial adviser.

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