It’s been an interesting period for risk assets over the past six months. The last quarter of 2018 saw markets retract as sentiment shifted away from risk assets, driven by fears of further rate rises in the US and a pullback in global growth. Roll forward to the March quarter of 2019 and it has been risk on for equities, with both Australian and global markets posting double-digit returns for the quarter.

The key catalyst for the reversal in trend was the US Federal Reserve’s announcement that they plan to keep rates on hold until further notice. Interest rate markets adjusted their expectations, implying that rates may even drop by the end of 2020. It highlights the significant influence the Fed has on market sentiment despite market fundamentals not materially changing.

For some time we have been communicating that we are in the later stages of the cycle. The latest recovery may well be a late-cycle market rally, but either way the extended tail of the cycle is still wagging. Our medium-term view remains that returns will be lower as markets become increasingly constrained by the late stage of the cycle and tighter liquidity. We also believe that market volatility will increase and that valuation opportunities will present themselves as some markets retract. A good example of this has been emerging market equities, where valuation support has been increasing for the sector following a pullback during 2018.

Based on our internal valuation model we believe that the sector offers value and that the expected returns compensate for the additional risk associated with emerging markets equities over the medium term. Conversely, we have reduced our exposure to Australian equities, noting a softening in company earnings and broader market implications associated with the housing slowdown.

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