Portfolio update January 2023

Multi-asset market update

Markets reversed again in January, rising as China abandoned its COVID-zero policy and markets interpreted the Fed’s commentary as becoming more dovish. All asset classes and subclasses rose, but the gains were most substantial in property and Australian equities. Within equities, value stocks rose much less than the broader market and growth equities performed strongly. Domestically, materials, consumer discretionary names and property were very strong. Government bonds rose as interest rate expectations fell, and credit posted positive returns too.  

Our portfolio posted positive returns, but the same defensive positioning that reduced the impact of the market falls in December also moderated the gains in January.

Multi-asset portfolio update

There are signs that rising interest rates are starting to have an effect, and central banks are moderating some of their language regarding future interest rate rises. CPI prints are benign and employment growth in the US appears to be slowing. However, with central banks determined to rein in inflation, we are wary of the market view that interest rates will fall while commodity prices will remain high and consumer spending will continue to be above trend.

We remain overweight fixed interest and underweight cash to capitalise on the higher yields on offer and have a pronounced tilt in favour of international equities over Australian stocks and value equities over growth.

Equities market update

The Australian equity market reversed course and rose strongly in January. Materials stocks, consumer discretionary and property stocks all surged, driven by improved sentiment from the Chinese government’s relaxation of COVID restrictions and expectations of a reduced pace of interest rate rises in future. High growth consumer stocks in particular had a strong month, recovering much of the ground they have lost in recent months.

Our defensive positioning helped protect the portfolio from much of the falls last month, and this month it meant the portfolio did not recover as strongly as the broader market.

Equities portfolio update

Central banks worldwide are raising interest rates, which is aimed at reducing demand below current levels. We are, therefore, wary of commodity producers and consumer companies that have been supported by unusually high demand. Domestically, higher interest rates are likely to stress consumers. However, the Australian banks are well-capitalised and have had time to prepare for a housing downturn, so higher interest rates should be a short-term positive for earnings that higher bad debt charges will not offset. We expect consumer-focused companies to bear the initial brunt of higher rates.

We continue to focus on companies that offer fair valuations and can remain resilient in the face of slowing growth. In particular, we are underweight commodity producers and consumer-focused stocks.

Concentrated Absolute Return portfolio update

Our portfolio rose in January as market sentiment turned again. Having less exposure to the consumer stocks most at risk from higher interest rates and the more speculative resources companies meant the portfolio rose less than the broader market, which was driven by those segments.

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 and Alumina, 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.

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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