Portfolio update March 2022

With more turmoil in markets over March, our defensive positioning and focus on better value investments helped protect the portfolios from the turbulence.

With falls in the prices of many high quality assets we’ve started to move the portfolios back to a more neutral stance by investing cash in bonds and select international equity markets.

Watch the video for details, or read the full commentary below.

Multi-asset market update

In March Australian equities rebounded strongly, returning to December 2021 levels. International equities fell and bond markets suffered some of the greatest falls in recent history as expectations of rate rises to combat inflation lowered valuations. Within equities value again outperformed growth and emerging markets investments fell.

Once again, our defensive positioning added value, particularly our underweight to bonds and our overweight to alternatives. Our focus on value equities rather than growth was also positive, but our portfolios with their blend of quality and value did not benefit as much from the resurgence in commodities stocks as some deep value managers.

Multi-asset portfolio update

Equity markets have recovered from the initial shock of the Russian invasion of Ukraine. But commodity prices remain high and inflation is still strong in developed countries. This has led central banks to foreshadow significant rises in interest rates, and this in turn has caused falls in bond prices (that is, increases in bond yields) and increases in the premium demanded by investors for taking on credit risk.

We have taken advantage of the better pricing in bond markets and international equities to reinvest cash into these asset classes. We remain defensively positioned, but the portfolio is now closer to neutral than it was at the start of March. In equities the gap between growth and value remains at very high levels, so we continue to focus on valuation within equity markets.

Equities market update

The Australian equity market was strong over March, recovering to levels last seen in December before the sell off in January. Value stocks outperformed growth, which was driven by strong performances from energy, banks and materials. IT stocks also performed well as these companies reversed some of their recent falls.

Our portfolio performed well, but lagged the market. This was almost entirely due to having a lower exposure to iron ore miners than the market benchmark and holding WBC and ANZ rather than CBA and NAB as the latter two banks rebounded from their previous weakness.

Equities portfolio update

Market sentiment appears to have recovered from the initial shock of Russia’s invasion of Ukraine, but commodity prices remain elevated. Central banks around the world are expected to take action to control high inflation, including raising interest rates and ending other support measures. For these policies to be successful they will need to reduce demand well below current levels. Coupled with the prospect of strong anti-COVID measures in China, we are not expecting commodity prices to remain at their current elevated levels for the long term.

We are taking profits on some of the more cyclical companies in the portfolio and reinvesting in high quality stocks and defensive stocks whose valuations have fallen over the last few months.

Concentrated Absolute Return portfolio update

The portfolio rose modestly in March, lagging the broader Australian equity market which was led by resurgent banks, iron ore miners and tech stocks. We took profits on more cyclical names in the portfolio that rerated over the month. We also removed SGR as additional concerns about the compliance of the company came to light. The proceeds were reinvested 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 as we believe that their historical rate of lending growth cannot be maintained, 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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