Portfolio update May 2022

May was another difficult month for investment markets, but our defensive positioning and focus on value have continued to reduce the market volatility’s impact on the portfolios. Watch the video for more, or read the full update below.

Multi-asset market update

May was another volatile month for investment markets. Listed property markets were down heavily in Australia and internationally as investors responded to higher interest rates. Equity markets also fell, but this month Australian equities fell more than their international peers. Once again falls were concentrated in high priced growth stocks, with many less expensive value names rallying over the month. Bond markets also fell as interest rate expectations rose. Credit spreads widened, as investors factored in higher risks of a recession in response to central bank tightening.

Our defensive positioning and focus on better value investments again added value over the month. Our underweight to equities and property reduced the impact of market volatility on the portfolio, and our low exposure to expensive growth stocks meant our equities allocations were more resilient than the broader market.

Multi-asset portfolio update

The prospect of central banks around the developed world raising rates rapidly to tame inflation has quickly pushed bond yields from historic lows to around fair value given the growth rates we are seeing in economies. At the same time, equity investors are dramatically cutting the amount that they are willing to pay for companies with strong growth forecasts. High growth companies whose growth falls below expectations have been doubly punished.

We have continued to reinvest funds from alternatives into government bonds as bond yields have improved. We remain defensively positioned overall but will increase our equity positions further if the valuations of equities continue to improve.

Equities market update

May was a difficult month for the Australian equity market. High priced internet stocks, consumer names and many real estate stocks fell heavily as interest rate expectations rose. Health care, utilities and the more cyclical sectors in the market were more resilient.

Our defensive positioning added value again this month. The portfolio’s focus on good quality companies that do not have demanding earnings expectations built into their share prices meant that the portfolio resisted most of the negative sentiment and fell significantly less than the broader market.

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 have started to raise interest rates, which is causing compression in the valuations of many high growth companies and should 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 avoiding businesses that have been propelled to high valuations by easy money and economic stimulus. The portfolio is focussed on companies that offer good quality and reasonable valuations, and stocks that stand to benefit from the increase in interest rates in Australia and we are actively managing positions through this period of turmoil.  

Concentrated Absolute Return portfolio update

Our portfolio gave up some of last month’s gains as sentiment toward soft commodities produces and real estate turned sharply negative. Medium term returns remain strong, however.

The portfolio is focussed on companies that are trading at depressed valuations following disruptions due to COVID and inflation in commodity prices. These companies should do well as conditions return to normal.

The portfolio has a large allocation to industrials, where we hold 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, Brambles and Virgin Money UK, each of which offers good value given its earnings potential. The portfolio has a small allocation to Australian banks, as rising interest rates should be positive for near-term earnings.

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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