Portfolio update July 2022
July saw a bounce in most markets as investors took the Fed’s revised commentary as a dovish signal. However, while growth remains strong economic risks have arguably increased. Watch the video for more, or read the commentary below.
Multi-asset market update
Markets had some respite from negative news in July. The Fed hiked interest rates as expected, and investors interpreted the commentary from the central bank as being more dovish than previously. As a result, the trends of recent months reversed: bond yields fell (bond prices rose) and small caps, growth stocks and property investments surged. Value equities also rose, but less than growth stocks. Emerging markets equities were the only sector of investment with negative returns.
Our portfolio rose with this buoyant sentiment, but our defensive positioning meant that our portfolio rose less than benchmarks.
Multi-asset portfolio update
Despite worsening economic news inflation remains stubbornly high. Central banks around the world are committed to fighting inflation and the longer that inflation remains high, the greater the likelihood that central bank action provokes a recession. Growth remains strong, and we expect inflation to be tamed, but that high inflation means real wages are falling in most countries, and higher interest rates are putting additional stress on consumers and companies.
We have taken some profits on recent equity and bond market rises, keeping the proceeds in cash. With a mix of positive and negative signals, we remain close to strategic weights but still defensively positioned overall. Markets are volatile, and we will continue to adjust portfolios as they move.
Equities market update
The Australian equity market rose in July. Falling bond yields meant long duration growth stocks and interest rate sensitive names did best, with IT and property up 15% and 12% respectively. Defensive sectors had more modest returns, as did energy. Materials stocks fell during the month as commodity prices fell.
Our portfolio fractionally outperformed, despite our defensive positioning. Within sectors, our portfolio holdings lagged peers, but our sector focus added more value. In particular, our holdings in property and previously taking profits on energy helped the portfolio to outperform this month.
Equities portfolio update
Central banks around the world are raising interest rates, which is has caused compression in the valuations of many high growth companies but is also aimed at reducing demand below current levels. While energy prices remain high, the prospect of lower demand and improving supply has started to reduce the prices of other commodities. Domestically, higher interest rates are likely to stress consumers, and buy-now-pay-later firms are already reporting high arrears.
While global growth remains robust, inflation and high interest rates are likely to put pressure on Australian households, so we are continuing to focus on companies that offer fair valuation and can remain resilient in the face of slowing growth.
Concentrated Absolute Return portfolio update
Our portfolio had strong returns during July. The reversal in sentiment meant that most of the portfolio’s holdings outperformed the broader equity market.
The portfolio is focused on companies 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 offering 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.
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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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