August was another strong month for equity markets however some storm clouds have reappeared amidst the collapse of Evergrande, one of China’s biggest property developers, as the Chinese government sought to stem excessive borrowing leaving the heavily indebted company with over $400B in debt. The main concern is that the collapse may have a flow on effect on the Chinese property market, which has grown at an incredible rate, and ultimately impact the Chinese economy. We have seen some evidence of contagion reflected in high yield markets and other property markets such as Hong Kong. Markets are also watching what direction central banks will take on their asset purchases programs and whether they will seek to taper the programs and if so to what extent.
From an asset class perspective, we are still supportive of risk assets despite some of the risks mentioned earlier, as bonds, including government and corporate bonds, offer limited relative value in the current environment. However, we continue to see asset valuations rise notably in Australian equities. We continue to monitor valuations looking for opportunities to take profits where applicable.
We are also observing an increase in the dispersion in returns on an asset class, country and stock level. We believe that such an environment is increasingly supportive of an active approach to asset management. We also believe that ensuring that portfolios are diversified in their exposures will become more important in the coming 12 months. One of our main challenges is identifying diversifying assets in the current environment and Lonsec’s investment committees are working hard to identify appropriate assets.
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