The recent increased number of Covid-19 cases in Australia and in some parts of the globe highlights how quickly things can change and why it is critical that your portfolios are diversified and have some protection.
Markets have continued to be buoyed by strong performance and despite continuing concerns regarding inflation, the markets had some relief as bond yields pulled back over the quarter. Key Central banks have taken the view that much of the rise in CPIs is attributed to supply/demand imbalances caused by Covid, these imbalances will diminish and alleviate some of the current inflationary pressures. Lonsec’s base case in aligned to this view and while we expect inflation to rise over the next six months, we believe that it will subside.
Policy setting also remains conducive to equity markets, with interest rates remaining low as inflation subsides. In addition to supportive monetary policy, fiscal support also remains a continuing theme. Economic indicators such as employment figures, PMIs and consumer confidence all suggest that the economic recovery in well on track, with some indicators exceeding pre Covid levels.
Despite these positives, risks remain – one of the biggest being complacency. While we believe that risk assets continue to offer a suitable return relative to bonds and cash, the increasing divergence in asset and security returns suggests not all boats will float equally. Some of our indicators suggest that the threat of a ‘tail risk’ event is on the rise. Policy error, geopolitical tensions or the path of the pandemic taking an unexpected turn are all plausible. Therefore, ensuring portfolios are diversified remains important.
We have positioned our Dynamic Asset Allocation model to reflect our belief that portfolio diversification remains important. The July Investment Outlook Report summarises the outlook for each asset class included in our asset allocation framework.
Our Dynamic Asset Allocation model is available to iRate subscribers via the quarterly Investment Outlook Report. To access the latest Investment Outlook Report, sign up for a two-week trial of iRate, our market leading research platform.
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