There continues to be a question as to whether markets are reflecting economic reality as they continue their upward trajectory.
Within our investment committee process we remain focused on assessing asset valuations, where we are in the cycle and shorter-term sentiment indicators. We have observed a reduction in valuation opportunities within equities, given that share markets, most notably in the US, have recovered since their trough in March. Our valuation model indicates that most asset classes are trading at fair value, with the exception of government bonds, which continue to look expensive, and A-REITs, which look attractive on a relative basis. However, within A-REITs we believe that being selective on a sector and security level is important.
Liquidity and policy settings remain favourable as central banks and governments continue to prop up economies via monetary easing and fiscal measures. Cyclical indicators remain weak, with most economic indicators such as unemployment figures and PMIs showing weakness, although some data coming out for June has been better than expected. Finally, risk indicators such as the VIX and MOVE indices appear to have stabilised. Indeed, the MOVE index, which measures implied volatility within bond markets, has returned to pre COVID-19 levels.
We have not changed our asset allocation settings and remain relatively neutral to risk assets.
While markets have shown strength, risks remain. The extent to which there is a disconnect between share markets and what is happening on the ground remains a focal point. Geopolitical risks, while ever present, continue to impact market volatility. Tensions between the US and China are elevated, and the outcome of the US presidential election in November remains uncertain.
Finally, the rise in the number of COVID-19 cases globally continues to create uncertainty as to the shape of any recovery. An important factor in the coming months will be the extent to which governments continue with fiscal measures to support the economy.
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