Portfolio update February 2022

Our defensive positioning again added value in February and our tilt toward value stocks, particularly energy in direct Australian equities, was rewarded.

We’ve started to take profits on these positions and increase our holdings in high quality investments as valuations normalise, but the pace of these changes has slowed as the Russian invasion of Ukraine has increased the risks to global growth. The video below explains more, or read the full commentary below.

Multi-asset market update

February was another challenging month for investment markets, with international equities and property, fixed interest and alternatives falling as inflation continued to be strong and energy prices rose. Only Australian equities and property, and cash, posted positive returns. Within equities, value outperformed quality and growth stocks as interest rate rises continued to put pressure on the long term valuation of growth stocks. Interest rate expectations weighed on bonds too, and credit investments fell as the premium investors demanded for credit risk rose from extremely low levels.

Our defensive positioning again added value, as did our focus on investments with reasonable valuation, reducing the impact of falling markets on the portfolios. Energy exposures in Australian equities were again a highlight for the portfolio as the oil price continued to rise and the valuations of energy companies closed more of the gap with overseas peers.

Multi-asset portfolio update

The growth outlook has weakened slightly with the Russian invasion of the Ukraine stoking geopolitical tensions and raising the risks of supply chain disruptions. Central banks are now expected to slow the end of their extraordinarily accommodative policies, but the trend for interest rates is still upward. Given high expectations for high quality growth assets and rich valuations for bonds generally we remain underweight equities and fixed interest, and continue to favour value equities in 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 rebounded in February, making up some of the ground lost in January. Energy, consumer staples and materials were the best performing sectors, driven by inflating food, energy and commodity prices. Technology stocks and high growth consumer discretionary names were the worst performing parts of the market, driven by increased interest rate expectations that are challenging the extremely high valuations of these stocks.

Our portfolio again outperformed substantially over the month, with both sector allocation (avoiding expensive growth sectors and being overweight energy) and selection of more reasonably priced stocks within sectors adding value. As a result, the portfolio is up year to date when the broader market has fallen.

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. Rising tensions following the invasion of Ukraine by Russia have tempered our expectations for global growth somewhat, but we still expect rates to rise to combat inflation in the near term.

As the more cyclical stocks in the portfolio have increased in value we have started to take profits on these positions, and reinvesting in select high quality stocks whose valuations have fallen to more reasonable levels over the last few months. With increased oil prices now being recognised in the share prices of energy stocks we are also reducing our energy positions and increasing our positions in more defensive sectors.  

Concentrated Absolute Return portfolio update

The portfolio rose strongly in February, outperforming the broader equity market. We took profits on a number of more cyclical names in the portfolio that rerated over the month and reinvested the proceeds into higher quality businesses that still remain at low valuations.

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.

Taxation warning: Any taxation considerations are general and based on present taxation laws and may be subject to change. Aequitas is not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and investors should seek tax advice from a registered tax agent or a registered tax (financial) adviser if they intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.

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