In recent weeks we’ve seen increased market volatility. The Nasdaq, which represents the leading technology stocks in the US market, has seen a pull back following an incredible rally, and markets seem to be in a range-trading pattern. We all know the saying that when the US market sneezes, the rest of the world catches a cold, and there is some truth in that.
The much-anticipated upcoming US presidential election is certainly contributing to market volatility. Historically, in the months leading up to US elections, markets have exhibited an increased level of volatility, and it is no different this time. Markets are not political, but they are sensitive to uncertainly, so as we get closer to the election in November, we are likely to see the market gyrate. As to how markets will react to a Republican or Democratic win, history is not conclusive on this, however what has been observed is that in the lead up to an election, avoiding recessions and a positive stock market tend to assist re-election.
On the policy front, attention has shifted from monetary policy to fiscal policy and markets are looking to see to what extent fiscal support will continue to prop up economies across the world. In Australia, as we await the wind back of policies such as the JobKeeper payment scheme, markets will be watching carefully to see if we succumb to the so-called ‘fiscal cliff’ and to what degree some sectors have been supported by government money. The retail sector in particular will be interesting to observe given the incredible rebound and resilience the sector has shown since March, with companies such as Harvey Norman and Nick Scali posting strong sales.
Amidst this backdrop we have not shifted our Lonsec asset allocation views. While we have seen some valuation support appear within Australian equities, much of the value is being driven by down beaten-down parts of the market, such as the banks, and we still think the sector will face challenges in a world dominated by low interest rates, so at this stage we have opted to retain our ‘Neutral’ exposure to Australian equities. If we see a material pull back in markets over the next few weeks or months, we will reconsider our position across Australian and global equities.
Importantly, we have adjusted our portfolios to assist in managing downside risk by taking specific sector and investment strategy tilts within the portfolios, and at the same time having exposure to growth parts of the market should markets appreciate. Alternative allocations such as our gold exposure have performed in line with expectations, holding up better than equity markets on down market days.
In the meantime, buckle up because the ride may be bumpy over the coming months!
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