By Lukasz de Pourbaix, Executive Director & CIO – Lonsec Investment Solutions
Markets have been buoyed as signs of an economic recovery continue to be reflected in economic data. The IMF (International Monetary Fund) has revised their projections upwards on global GDP growth with the US expected to grow by 6.4% in 2021 and China by 8.4% over the same period. Domestically, we have seen a similar trend with manufacturing and non-manufacturing sectors as measured by the PMI (Purchasing Managers’ Index) lifting in March and consumer sentiment also on the rise.
The rotation into cyclical and contrarian value stocks continued for the first two months of the quarter as the market digested the prospect of an economic recovery and the potential for an uptick in inflation. Lonsec’s base case is that we may see a modest rise in inflation over the next 12 months, but that over the medium-term inflation will remain under control as broader structural deflationary pressures such as the continual impact of technology in society and the aging population continue to weigh down on most developed economies.
From an asset allocation perspective, we continue to favour risk assets over bonds despite bond yields rising over the quarter. Over the medium term we believe that cash rates and bond yields will remain relatively low which will continue to be conducive for risk assets. From a dynamic asset allocation perspective, we are favouring Australian Equities and Emerging Markets and within Fixed Income we are seeking to diversify away from duration risk.
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