The start of 2023 has been generally positive for markets. While the rally has been a welcome relief from the tumultuous market environment in 2022, the key question is whether the recent rally has legs or whether it is simply a bear market rally with more volatility to follow as we progress into 2023.

The market has been skittish over the past 12 months with any positive news on the inflation front, such as any sign that inflation is moderating, resulting in the market to rally. While the most recent rally has partially been driven by some evidence that we are closer to reaching peak inflation, we have also seen liquidity pumped into the market which has not doubt supported market returns. Central banks have been generally decreasing their balance sheets with key central banks such as the US Federal Reserve moving from a quantitative easing policy to a quantitative tightening policy, which has reduced the overall liquidity that’s supporting markets. But we also have seen some central banks, notably the Bank of Japan (BoJ) and the People’s Bank of China (PBOC), add liquidity to markets in recent months, which markets have liked. However, we do not believe that this trend is structural and that the direction of inflation and potential impact on economic growth will be the key driver of markets as we progress throughout 2023.

Our base case remains that the third quarter of 2023 will be ‘d-day’ for markets as the direction which company earnings will take, due to the impact of higher interest rates, will be clearer. The most recent company reporting season suggests that there is evidence of slowing in demand, however this is not consistent across all sectors and companies.

Overall, we believe that market returns may trend sideways for the full year with a possible downturn later in the year. In such an environment being able to pick out the ‘winners’ from the ‘losers’ will be increasingly important as simply riding the broader market to generate returns will be more challenging.

IMPORTANT NOTICE: This document is published by Lonsec Investment Solutions Pty Ltd ACN 608 837 583, a Corporate Authorised Representative (CAR 1236821) (LIS) of Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec Research).  LIS creates the model portfolios it distributes using the investment research provided by Lonsec Research but LIS has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec Holdings Pty Ltd ACN 151 235 406. Please read the following before making any investment decision about any financial product mentioned in this document.

DISCLOSURE AT THE DATE OF PUBLICATION: Lonsec Research receives a fee from the relevant fund manager or product issuer(s) for researching financial products (using objective criteria) which may be referred to in this document. Lonsec Research may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec Research services.  LIS receives a fee for providing the model portfolios to financial services organisations and professionals. LIS’ and Lonsec Research’s fees are not linked to the financial product rating(s) outcome or the inclusion of the financial product(s) in model portfolios. LIS and Lonsec Research and their representatives and/or their associates may hold any financial product(s) referred to in this document, but details of these holdings are not known to the Lonsec Research analyst(s).

WARNINGS: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to general advice and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness.  If the financial advice relates to the acquisition or possible acquisition of a particular financial product, the reader should obtain and consider the Investment Statement or the Product Disclosure Statement for each financial product before making any decision about whether to acquire the financial product.

DISCLAIMER: No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by LIS. The information contained in this document is current as at the date of publication. Financial conclusions, ratings and advice are reasonably held at the time of publication but subject to change without notice. LIS assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, LIS and Lonsec Research, their directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.

Copyright © 2023 Lonsec Investment Solutions Pty Ltd ACN 608 837 583 (LIS). This document may also contain third party supplied material that is subject to copyright.  The same restrictions that apply to LIS copyrighted material, apply to such third-party content.

Lonsec Holdings today announces key strategic appointments following the acquisition of Implemented Portfolios Limited in August 2022. Bruce Hawkins joins in the newly created role of Chief Operating Officer, Naomi Christopher is appointed a Head of Marketing and PR across the Lonsec Group and Steve Garth is appointed as Lonsec Product Investment Oversight Committee Chair.

Bruce has over 30 years’ experience in financial services with an extensive track record across investment platforms, superannuation and life insurance. Bruce has held a number of senior positions spanning finance, operations and strategic development with companies including NAB Wealth, Aviva Australia and Xplore Wealth Limited. Prior to joining Lonsec, Bruce was Group Executive – Xplore Wealth at HUB24 Limited leading the Xplore business whilst assisting in its integration into the broader HUB24 business.

Naomi Christopher was most recently National Manager – Marketing and Communications at Implemented Portfolios (IPL) and joined Lonsec Holdings following the acquisition of IPL. Her career in financial services spans 13 years, where she has worked in similar marketing and communications related roles at other financial services businesses such as Midwinter Financial Services (a Bravura owned company) and SQM Research, the funds research and ratings house.

Lonsec CEO and Managing Director of IPL, Mike Wright says “Over the past six months, both the Lonsec and IPL teams have worked tirelessly to understand each business and client groups. I am excited about the growth plans we have for the coming year and the integration of our services to all clients. Bruce has led this integration project and I am delighted that he is joining in a permanent capacity.”

“I am equally delighted that Naomi is taking on the broader Head of Marketing and PR role across the group as she built IPL’s formidable marketing presence” continues Mike.

As part of the integration of the businesses, key Lonsec portfolio managers have been appointed to the IPL Asset Allocation and Investment Committee (AAIC), which is responsible for the investment decisions relating to the IPL portfolios. Lukasz de Pourbaix joined long-standing independent members of the committee post the acquisition of the business by Lonsec in 2022 and will be joined by Nick Field, Associate Portfolio Manager for Lonsec’s listed suite of portfolios. Nick has extensive portfolio management and investment research experience having held various investment research and portfolio management roles for the past 20 years. Nick will provide additional insights and rigour to the AAIC governance process.

Finally, Lonsec has also bolstered its internal portfolio governance framework with the establishment of a group Product Investment Oversight Committee (PIOC). The PIOC is a sub board committee to the Lonsec Board and is responsible for ensuring that the IPL and Lonsec portfolios have the necessary personnel, processes and risk management frameworks in place. Lonsec has appointed Dr Steve Garth as independent chair of the PIOC. Dr Garth brings to the PIOC two decades of experience in key Financial Services roles, including a broad career managing Australian and Global portfolios.

Release ends

For more information, please contact:

Nicci Chaplin
Senior Communications Manager
nicci.chaplin@lonsec.com.au
0402 317 746

Over the course of 2022 our message to investors has been simple. Markets are in a period of transition and with transition comes some pain. The rapid shift from record-low interest rates and liquidity-fueled markets to one of higher interest rates and central banks shrinking their balance sheets has impacted markets. This has been coupled with the ongoing effects of Covid on economies, notably China and the unexpected conflict in Ukraine with both events contributing to rising inflation which has been the topic du jour for all of 2022.

What can we expect from markets in 2023?

We should hit peak inflation in 2023. Central banks around the globe have been aggressively raising rates to curb inflation. In Australia the December CPI figure hit 7.8% with the cash rate target reaching 3.10% up from 0.10% in December 2022. Cyclical indicators have been broadly trending down and we are yet to see the full impact of rate rises on households. We believe that demand will show more material signs of slowing in the second and third quarter of 2023 which should see inflation stabilise.

Mild recession is a possibility. The inverted yield curve is suggesting that a recession is on the cards. Historically, recessions have occurred 12 to 18 months after the yield curve has inverted. While the likelihood of a recession is elevated, the relatively strong labor market is expected to reduce the risk of a deep prolonged recession. We do however expect segments of the economy to be hit harder than others, such as the construction industry which has already experienced a downturn following rises in interest rates. Conversely Australia’s exposure to materials and the expected reopening of China from strict Covid lockdowns is expected to benefit things such as iron ore exports.

Company earnings to slow second half of 2023. We are yet to see the full impact on demand on the back of interest rate rises. While the savings ratio has been declining as households increasingly dip into their savings, households are still spending with travel spending being the big winner. However, our expectation is that we will observe a slowdown in demand in the second half of the year as many household budgets get a jump in their mortgage repayments as their fixed rate loans roll-off and they move towards the higher variable rate. This should see a slow down in discretionary spending which should show up in company earnings later in the year.

Range trading market. Markets have started 2023 on a positive note. Some of acute issues that adversely impacted markets in 2022 have subsided. Energy prices, which rose sharply following the Russian invasion of Ukraine have fallen with European gas prices falling by over 27% in January alone. Furthermore, the consumer is still buoyant despite higher interest rates. As 2023 progresses and the impact of rising rates makes its way through the economy and company earnings come under increased pressure, we may see the market pull back. Net-net it is plausible that 2023 may be a relatively flat market characterised by spikes in volatility both to the upside and the downside.

From a portfolio perspective, if we experience a down market our Retirement suite of portfolios which have been first quartile performers during 2022 should hold up relatively well given their exposure to income generating companies and a range of absolute returns strategies. Likewise, our Multi-Asset portfolios which have a significant exposure to alternative assets should be able to buffer the downside due to the diversification benefits alternatives bring to portfolios. Our listed range of portfolios continue to hold exposure to quality companies and a diversified range of asset class exposures. Further downside will provide opportunities to gain exposure to quality growth companies that previously traded at significant premiums. Finally, our Sustainable range of portfolios which have experienced a challenging period in term of returns should see returns stabilize, provided that we do not experience another spell where energy prices rise sharply as the portfolios have limited exposure to energy given the focus on ESG factors and the awareness of the UN Sustainable Development Goals.

IMPORTANT NOTICE: This document is published by Lonsec Investment Solutions Pty Ltd ACN 608 837 583, a Corporate Authorised Representative (CAR 1236821) (LIS) of Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec Research).  LIS creates the model portfolios it distributes using the investment research provided by Lonsec Research but LIS has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec Holdings Pty Ltd ACN 151 235 406. Please read the following before making any investment decision about any financial product mentioned in this document.

DISCLOSURE AT THE DATE OF PUBLICATION: Lonsec Research receives a fee from the relevant fund manager or product issuer(s) for researching financial products (using objective criteria) which may be referred to in this document. Lonsec Research may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec Research services.  LIS receives a fee for providing the model portfolios to financial services organisations and professionals. LIS’ and Lonsec Research’s fees are not linked to the financial product rating(s) outcome or the inclusion of the financial product(s) in model portfolios. LIS and Lonsec Research and their representatives and/or their associates may hold any financial product(s) referred to in this document, but details of these holdings are not known to the Lonsec Research analyst(s).

WARNINGS: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to general advice and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness.  If the financial advice relates to the acquisition or possible acquisition of a particular financial product, the reader should obtain and consider the Investment Statement or the Product Disclosure Statement for each financial product before making any decision about whether to acquire the financial product.

DISCLAIMER: No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by LIS. The information contained in this document is current as at the date of publication. Financial conclusions, ratings and advice are reasonably held at the time of publication but subject to change without notice. LIS assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, LIS and Lonsec Research, their directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.

Copyright © 2023 Lonsec Investment Solutions Pty Ltd ACN 608 837 583 (LIS). This document may also contain third party supplied material that is subject to copyright.  The same restrictions that apply to LIS copyrighted material, apply to such third-party content.

As the saying goes, “what a year!” As the world slowly emerged out of Covid lockdowns, two central themes have dominated 2022, inflation and geopolitics. Domestically the annual CPI figure has exceeded 7%. It has been a similar story across most economies globally as a cocktail of years of low interest rates, central bank driven liquidity in the form of quantitative easing, severe supply chain disruptions caused by Covid lockdowns and the Russian invasion of Ukraine placing pressure on commodity prices have all contributed to the current inflationary environment. As a result, interest rates have gone up with key central banks committed to raising rates until inflation shows signs of abating. The rising interest rate environment has fueled volatility in markets with no asset class spared as assets have repriced for the higher interest rate environment. Needless to say, it has been a challenging time for diversified portfolios as equities and bonds have both sold off.

Additionally, as the market has tried to digest the prospect of higher inflation, we also witnessed a sharp rotation into sectors and stocks that were viewed as being beneficiaries of higher inflation such as energy stocks, with sectors such as healthcare and technology selling off irrespective of the quality of the company.

Despite the challenging market environment there have been some bright spots. Alternative assets have generally benefited from the increased market volatility and dispersion in returns. Unlike traditional assets, higher volatility is more conducive to alternative strategies such as relative value approaches as they can exploit market inefficiencies. Value-based investment approaches have also turned around a decade of underperformance relative to growth-style investing as growth stocks, which are viewed as longer duration assets, have been sold off. We have also seen many active approaches able to add value in this challenging period for markets as active investment managers have been able to sift through the market as asset have indiscriminately sold off. Finally, bonds which have been difficult to invest in for years due to the low interest rate environment are beginning to show signs of value as bond yields have risen.

In 2023 the themes of inflation and heightened geopolitical risk are expected to continue to be key focal points. However, the narrative will increasingly focus on the prospect of a recession as the impact of higher interest rates makes its way through the economy impacting households and ultimately demand which we expect will make its way to corporate earnings by Q3 in 2023. At this stage our base case is not for a deep recession in Australia. However, on a global level Europe remains at greater risk of a deep recession as high inflation combined with energy security concerns resulting from geopolitical risks associated with the war in Ukraine continue to impact European markets. Central banks appear to be comfortable with the prospect of a recession as long as inflation is controlled. Against this backdrop we have been gradually neutralising our key active asset allocation exposures away from risk assets in favour of bonds.

The year ahead will be challenging with markets likely to range trade. Our dynamic asset allocation has added significant value over recent years as the decision to be long equities and underweight bonds was a relatively simple one. We expect that bottom up manager and stock selection will be a greater contributor to returns in 2023 as we continue to see increases dispersion in returns within asset classes as market volatility remains.

On behalf of the Lonsec Investment Solutions team we wish everyone a peaceful festive period and we look forward to working with each of you in 2023.

IMPORTANT NOTICE: This document is published by Lonsec Investment Solutions Pty Ltd ACN 608 837 583, a Corporate Authorised Representative (CAR 1236821) (LIS) of Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec Research).  LIS creates the model portfolios it distributes using the investment research provided by Lonsec Research but LIS has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec Holdings Pty Ltd ACN 151 235 406. Please read the following before making any investment decision about any financial product mentioned in this document.

DISCLOSURE AT THE DATE OF PUBLICATION: Lonsec Research receives a fee from the relevant fund manager or product issuer(s) for researching financial products (using objective criteria) which may be referred to in this document. Lonsec Research may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec Research services.  LIS receives a fee for providing the model portfolios to financial services organisations and professionals. LIS’ and Lonsec Research’s fees are not linked to the financial product rating(s) outcome or the inclusion of the financial product(s) in model portfolios. LIS and Lonsec Research and their representatives and/or their associates may hold any financial product(s) referred to in this document, but details of these holdings are not known to the Lonsec Research analyst(s).

WARNINGS: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to general advice and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness.  If the financial advice relates to the acquisition or possible acquisition of a particular financial product, the reader should obtain and consider the Investment Statement or the Product Disclosure Statement for each financial product before making any decision about whether to acquire the financial product.

DISCLAIMER: No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by LIS. The information contained in this document is current as at the date of publication. Financial conclusions, ratings and advice are reasonably held at the time of publication but subject to change without notice. LIS assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, LIS and Lonsec Research, their directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.

Copyright © 2022 Lonsec Investment Solutions Pty Ltd ACN 608 837 583 (LIS). This document may also contain third party supplied material that is subject to copyright.  The same restrictions that apply to LIS copyrighted material, apply to such third-party content.

This year has seen the largest increase in global inflation since 1980 when the OPEC oil shocks in the late 1970s caused inflation to reach over 14% in the US and above 10% in Australia.

Inflation is generally regarded as damaging to holders of cash and cash equivalent securities such as fixed-income products because their value or income received usually does not keep pace with the increased cost of goods and services. As a result, central banks hike interest rates to curb inflation. In the early 1980s the US fed funds rate peaked at 20% whilst in Australia the RBA cash rate and the 90-day bank bill rate both reached 22%. In response to this year’s inflationary breakout, we have seen the swiftest and largest series of central bank interest rate increases that now surpass the 1994 central bank rate hikes. To put this into an Australian perspective, at the end of the September quarter of last year, the RBA cash rate stood at 0.10%. A year later, towards the end of September 2022 and the rates had moved dramatically higher to an RBA cash rate of 2.35% (currently 2.85%). As a result, we have seen absolute negative returns for many fixed-income indices and products for the first time since 2008.

During a period of rising interest rates fixed-income investments that pay a fixed rate of interest, such as bonds, are not helpful for two reasons: firstly, there is an inverse relationship between a bond’s price and its yield – as interest rates increase, bonds fall in value, so bondholders can face capital losses but only if the bonds are sold prior to maturity. Secondly, the income coupon stream from fixed-rate bonds remains the same until maturity so no increase in income which occurs with floating-rate securities.

In contrast, investments that pay a variable or floating rate of return are likely to be better off in an inflationary environment, as the interest rate they pay is adjusted periodically to reflect market rates. If interest rates rise, the interest paid by the investment should also increase. Investors in these types of securities and products do like interest rate hikes as they have very little interest rate duration risk. Therefore, Lonsec believes a diversified portfolio of fixed-income strategies with a time horizon over 3 to 5 years should include both fixed and floating-rate strategies to reduce the impact of market volatility over time. Because at different stages of the investment cycle you will require both fixed and floating debt securities and products.

Lonsec recently took advantage of the rise in interest rates and higher yields to increase exposure to Fixed Income from underweight back to a neutral position. This was at the expense of Global Equities and Infrastructure. The reason for this move was that fixed-income fund managers can now buy debt securities at much lower prices than last year which over time to maturity will see a greater capital gain potential (positive returns) as the yield to maturity is now significantly higher. In addition, the US Federal Reserve and the RBA have both indicated that the pace of rate hikes may now slow, as they are nearer to the end of the current rate hike cycle. The impact of this will be felt next year as economic growth slows and inflation subsides to once again allow long bond yields to rally lower again even if they keep the cash rate elevated for a period.

IMPORTANT NOTICE: This document is published by Lonsec Investment Solutions Pty Ltd ACN 608 837 583, a Corporate Authorised Representative (CAR 1236821) (LIS) of Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec Research).  LIS creates the model portfolios it distributes using the investment research provided by Lonsec Research but LIS has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec Holdings Pty Ltd ACN 151 235 406. Please read the following before making any investment decision about any financial product mentioned in this document.

DISCLOSURE AT THE DATE OF PUBLICATION: Lonsec Research receives a fee from the relevant fund manager or product issuer(s) for researching financial products (using objective criteria) which may be referred to in this document. Lonsec Research may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec Research services.  LIS receives a fee for providing the model portfolios to financial services organisations and professionals. LIS’ and Lonsec Research’s fees are not linked to the financial product rating(s) outcome or the inclusion of the financial product(s) in model portfolios. LIS and Lonsec Research and their representatives and/or their associates may hold any financial product(s) referred to in this document, but details of these holdings are not known to the Lonsec Research analyst(s).

WARNINGS: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to general advice and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness.  If the financial advice relates to the acquisition or possible acquisition of a particular financial product, the reader should obtain and consider the Investment Statement or the Product Disclosure Statement for each financial product before making any decision about whether to acquire the financial product.

DISCLAIMER: No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by LIS. The information contained in this document is current as at the date of publication. Financial conclusions, ratings and advice are reasonably held at the time of publication but subject to change without notice. LIS assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, LIS and Lonsec Research, their directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.

Copyright © 2022 Lonsec Investment Solutions Pty Ltd ACN 608 837 583 (LIS). This document may also contain third party supplied material that is subject to copyright.  The same restrictions that apply to LIS copyrighted material, apply to such third-party content.

By: Brendan Tully, Managed Account Consultant

Recently, there has been much commentary on rising interest rates and inflation and the impacts on investment returns and your clients’ outcomes. There have been very few sectors which have produced positive returns in the last 12 months and so the impacts have been felt across the range of investor profiles. No one has escaped unscathed.

It can be challenging in these conditions to feel confident that your advice is delivering value to your clients. While we like to think that we, and our clients, make rational decisions when it comes to investments, this may not be the case due to information, cognitive and time limitations. Nobel prize winning political scientist Herbert Simon proposed the concept of ‘bounded rationality’-as humans we make partly irrational decisions due to cognitive, information and time limitations. There is an abundance of information and commentary, some of it consistent, some contrary and markets and the macro environment seem to move more quickly than ever. The speed of recent inflation increases, and corresponding interest rate movements, have caught many by surprise.

With this as the backdrop, it is important to consider the context of the advised client and the role that advisors play in a service that is now of more value than ever.

Below are some possible conversations that are occurring with your clients. How do you think through and respond to these rationally?

Do I move funds to cash or dilute my current risk tolerance?

It’s not rational that you can time the markets or grasp how much downside the market has already factored in. Are we at the bottom of the cycle? Can longer term compounding inflation impacts be met by changing to a more conservative asset allocation?

During the GFC in 2008, clients moving to cash locked in an average loss of 8.5%.[1] These loses were compounded as many of these clients stayed in cash and missed the corresponding market rebound. Vanguard’s research[2] indicated that in a US diversified portfolio of 50% equities and 50% bonds, not sold down, saw an average return of 7% between pre GFC peaks and the proceeding 11 years. Understanding the long term impact of investment decisions is one of the key values of advice.

Your advice value?

Clients invest for a purpose which your advice and strategy is designed to deliver. Your value in assisting clients stay true to that course and not falling into an irrational decision cycle should not be underestimated. Has the strategy changed, are the client’s goals still relevant? Has the clients risk appetite changed, if so, is this an elastic response driven by current state or a deeper permanent shift?

Like advisors, my GP is a professional that has my long-term interests in mind, in their case my health. I am not convinced they would call my decision to reduce my prescription by half or my decision to cease all medication for an extended period a rational choice. It would be a decision not without consequence for my long-term health.

The long game.

From a client and business risk perspective is it appropriate to move in and out of client strategy in the hope that we are finding market highs and lows? There will always be market troughs and peaks and many factors outside of your control. Is it rational to make tactical moves at every market shift? In the long game your controllable’s become the client, education, communication, engagement and reaffirmation of objectives and goals and your strategy.

The importance of clarity and context

How do we recognise and replace irrational decisions with rational ones?

One solution is a considered, clear, and articulated Investment philosophy. Your Investment Philosophy is a reference point that reminds you (and your clients) of your fundamental investment beliefs. These are rational beliefs that in times of stress can be replaced with irrational ones and provides clarity when you need it most.

Lonsec has a clear investment philosophy, and every decision is made with these principles in mind. It is the guiding reference that helps provide stability, particularly in times of market upheaval. We have stayed true to these principles because it is what our clients expect, and we know it is the correct approach when playing the long game. As Roy E. Disney said, “when your values are clear to you, making decisions becomes easier.”

Be clear on your value and remind clients of this value in every conversation and decision made. Be clear in your investment philosophy, be great at revisiting goals, be good at assisting your clients in staying the course and have confidence in the resilience of your advice. Effective strategic advice creates immediate and long-lasting client value. Its positive impact will linger long after the market cycle has shifted.


[1] ‘Should you switch to cash when markets are volatile?’ Aware Super October 2019

[2] ‘The global financial crisis: Behind us but far from over’ Vanguard September 2018

Disclaimer:

Brendan Tully is a Managed Account Consultant with Lonsec Group.  This information is for personal, non-commercial purposes only and is not intended to be financial product advice.

IMPORTANT NOTICE: This document is published by Lonsec Investment Solutions Pty Ltd ACN 608 837 583, a Corporate Authorised Representative (CAR 1236821) (LIS) of Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec Research).  LIS creates the model portfolios it distributes using the investment research provided by Lonsec Research but LIS has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec Holdings Pty Ltd ACN 151 235 406. Please read the following before making any investment decision about any financial product mentioned in this document.

DISCLOSURE AT THE DATE OF PUBLICATION: Lonsec Research receives a fee from the relevant fund manager or product issuer(s) for researching financial products (using objective criteria) which may be referred to in this document. Lonsec Research may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec Research services.  LIS receives a fee for providing the model portfolios to financial services organisations and professionals. LIS’ and Lonsec Research’s fees are not linked to the financial product rating(s) outcome or the inclusion of the financial product(s) in model portfolios. LIS and Lonsec Research and their representatives and/or their associates may hold any financial product(s) referred to in this document, but details of these holdings are not known to the Lonsec Research analyst(s).

WARNINGS: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to general advice and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness.  If the financial advice relates to the acquisition or possible acquisition of a particular financial product, the reader should obtain and consider the Investment Statement or the Product Disclosure Statement for each financial product before making any decision about whether to acquire the financial product.

DISCLAIMER: No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by LIS. The information contained in this document is current as at the date of publication. Financial conclusions, ratings and advice are reasonably held at the time of publication but subject to change without notice. LIS assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, LIS and Lonsec Research, their directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.

Copyright © 2022 Lonsec Investment Solutions Pty Ltd ACN 608 837 583 (LIS). This document may also contain third party supplied material that is subject to copyright.  The same restrictions that apply to LIS copyrighted material, apply to such third-party content.

For the past 10 years investors have become accustomed to double digit returns from equities and low market volatility. As interest rates normalise we are heading into a different market environment characterised by higher volatility and greater dispersion in returns between stocks. For some investors the last 10 years’ market environment is all they have known, while for others what markets were like prior the global financial crisis of 2008 is a distant memory.

We would argue that the past 10 years which was characterised by record low interest rates and ample liquidity, was not a normal market environment. In fact, it was an anomaly resulting from extreme unconventional monetary policy settings aimed at avoiding a deep recession or a global depression following the breakdown in financial systems in 2008. As central banks sailed down the path of quantitative easing (QE), at the back of their minds they were scratching their heads as to what will be their exit strategy from QE. Roll forward to today and inflation has given central banks their exit strategy, with key central banks raising interest rates and tapering their respective QE programs in order to stem demand and dampen inflation.

The move towards higher interest rates is a rest for the global economy and markets. Debt has become more expensive and companies which existed due to readily available cheap debt are disappearing or at a minimum being repriced aggressively. In this environment we are likely to see the strong get stronger and an increase in merger and acquisition activity as cashed up companies look for opportunities to grow their market share by acquiring companies with weaker balance sheets.

From a portfolio perspective, in this period of transition the traditional 60/40 portfolio has suffered as both equities and bonds have repriced as interest rates and bond yields have risen. So, does this mean that the traditional ‘balanced’ portfolio is dead? Our view is that the transition to higher interest rates will be painful however that as we reset to a more ‘normal’ market environment a ‘balanced’ style portfolio made up of equities, bonds and other assets such as alternatives will come back into vogue. In recent years a strategy of simply having an overweight to equities has been a winning strategy. However, we expect greater market volatility will make investing in equities less clear-cut and investors will need to be more discerning as to the companies they hold. Furthermore, the ‘unsexy’ world of bonds will become more interesting as bond yields rise and the relative attractiveness of bonds to equities increases.

We believe that we are heading back to markets of old where investors should expect single digit equity returns over the long term and higher levels of market volatility. In terms of total portfolio returns, we expect that diversification will become more critical and bonds will play a greater role in contributing to portfolio returns in the future.

IMPORTANT NOTICE: This document is published by Lonsec Investment Solutions Pty Ltd ACN 608 837 583, a Corporate Authorised Representative (CAR 1236821) (LIS) of Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec Research).  LIS creates the model portfolios it distributes using the investment research provided by Lonsec Research but LIS has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec Holdings Pty Ltd ACN 151 235 406. Please read the following before making any investment decision about any financial product mentioned in this document.

DISCLOSURE AT THE DATE OF PUBLICATION: Lonsec Research receives a fee from the relevant fund manager or product issuer(s) for researching financial products (using objective criteria) which may be referred to in this document. Lonsec Research may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec Research services.  LIS receives a fee for providing the model portfolios to financial services organisations and professionals. LIS’ and Lonsec Research’s fees are not linked to the financial product rating(s) outcome or the inclusion of the financial product(s) in model portfolios. LIS and Lonsec Research and their representatives and/or their associates may hold any financial product(s) referred to in this document, but details of these holdings are not known to the Lonsec Research analyst(s).

WARNINGS: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to general advice and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness.  If the financial advice relates to the acquisition or possible acquisition of a particular financial product, the reader should obtain and consider the Investment Statement or the Product Disclosure Statement for each financial product before making any decision about whether to acquire the financial product.

DISCLAIMER: No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by LIS. The information contained in this document is current as at the date of publication. Financial conclusions, ratings and advice are reasonably held at the time of publication but subject to change without notice. LIS assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, LIS and Lonsec Research, their directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.

Copyright © 2022 Lonsec Investment Solutions Pty Ltd ACN 608 837 583 (LIS). This document may also contain third party supplied material that is subject to copyright.  The same restrictions that apply to LIS copyrighted material, apply to such third-party content.

Following the reprieve in July, markets returned to being volatile in August as the narrative of higher inflation and subsequent higher rates re-gained momentum. In line with previous similar periods, all asset classes sold off with the exception of Australian equities which generated positive returns driven by materials and energy sectors. In such environments where narrow parts of the market drive returns, portfolio diversification is less effective. However, we would argue that diversification remains your best line of defense over the medium to long term, as the likelihood of generating consistent long term risk adjusted returns by investing in a narrow basket of assets is low.

When markets are volatile it can be difficult to focus on the long term and on the positives. However, as we see risks associated with higher interest rates and growing geopolitical tensions amplify, opportunities do and will present themselves in such periods. As with previous market downturns, be it the tech wreck or the global financial crisis, market dispersion creates opportunity, particularly on an individual security level, as markets tend to indiscriminately sell off entire segments of the market irrespective of the quality of individual assets. In such environments we see the good, the bad and the ugly sell off, which has been the case with the technology sector where companies with high debt and ‘promises’ of earnings sell off, alongside companies with strong balanced sheets and strong growth profiles.

Similarly, on an asset classes level, as assets reprice, asset classes that were previously unattractive on measures such a valuation, now deserve another look. A good example of this are bonds. For the best part of 10 years government bonds have been unattractive offering low yields and looking expensive on all valuation measures. This dynamic was fueled by central banks suppressing bond yields via measures such as quantitative easing (QE) coupled with the fact that inflation was non-existent. Roll forward to today and bond yields are above the 3% range, inflation is back and central banks are stopping or tapping on the brakes on QE. Therefore, the forward-looking risk return profile for the asset class is looking very different than the prior 10 years.

We expect volatility to remain with us for the coming months. Key central banks have been clear that they will continue to raise rates until they see evidence of inflation subsiding. The risk of a global recession is elevated as the lagging impact of higher interest rates are yet to come to the fore. From an Australian perspective the composition of the Australian economy, which is heavy on energy and materials, is expected to buffer Australia to some degree from a deep recession and our base case is that if we do go into a technical recession, it will be mild relative to other regions.

As market participants, thinking about the ‘x-factor’ risks is important. In the coming months, outside of inflation the thing to watch will be energy security, notably in Europe as the northern hemisphere winter approaches. The Russian invasion of Ukraine has had a material impact on European energy security, and we have witnessed key European economies look to pivot quickly to sure up energy for the winter, ranging from turning coal plant back on, delaying closing down nuclear plants through to finding alternative energy providers. Germany has already signaled that if they have a strong winter, they may need to ration energy and slow down industrial production to ensure households have enough heating. Such a scenario would further exacerbate the economic slowdown in Europe and would have implications for markets.

Change and transition is never easy and we are going through a significant change in the global economy and markets at the moment. It is a time to be vigilant but also a time to keep a long-term perspective, consider the facts, lean on your investment process and leverage people’s market experience.


IMPORTANT NOTICE: This document is published by Lonsec Investment Solutions Pty Ltd ACN 608 837 583, a Corporate Authorised Representative (CAR 1236821) (LIS) of Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec Research).  LIS creates the model portfolios it distributes using the investment research provided by Lonsec Research but LIS has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec Holdings Pty Ltd ACN 151 235 406. Please read the following before making any investment decision about any financial product mentioned in this document.

DISCLOSURE AT THE DATE OF PUBLICATION: Lonsec Research receives a fee from the relevant fund manager or product issuer(s) for researching financial products (using objective criteria) which may be referred to in this document. Lonsec Research may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec Research services.  LIS receives a fee for providing the model portfolios to financial services organisations and professionals. LIS’ and Lonsec Research’s fees are not linked to the financial product rating(s) outcome or the inclusion of the financial product(s) in model portfolios. LIS and Lonsec Research and their representatives and/or their associates may hold any financial product(s) referred to in this document, but details of these holdings are not known to the Lonsec Research analyst(s).

WARNINGS: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to general advice and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness.  If the financial advice relates to the acquisition or possible acquisition of a particular financial product, the reader should obtain and consider the Investment Statement or the Product Disclosure Statement for each financial product before making any decision about whether to acquire the financial product.

DISCLAIMER: No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by LIS. The information contained in this document is current as at the date of publication. Financial conclusions, ratings and advice are reasonably held at the time of publication but subject to change without notice. LIS assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, LIS and Lonsec Research, their directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.

Copyright © 2022 Lonsec Investment Solutions Pty Ltd ACN 608 837 583 (LIS). This document may also contain third party supplied material that is subject to copyright.  The same restrictions that apply to LIS copyrighted material, apply to such third-party content.

In this video, Dan Moradi, Portfolio Manager for Listed Products, provides an update on the Australian equity market following an interesting August reporting season and takes an in-depth look at how sectors and companies performed.

Similar to FY21, this year we had a challenging backdrop heading into the second half of the year, with the ongoing business disruptions caused by Covid, particularly with the Omicron wave that surged around Christmas. But given these challenges, what we saw during the reporting season from company results was pleasing, reflecting a stable operating environment and demonstrating that the underlying fundamentals of our domestic market remains strong despite the ongoing market volatility. Labour costs, labour constraints, price rises, and inventory management dominated discussions and outlook statements over the reporting period. To-date the market seems to be navigating these headwinds relatively well and we’ve seen many companies passing on the additional costs to end consumers to protect their profit margins.


The information in this video is prepared by Lonsec Investment Solutions Pty Ltd ABN 95 608 837 583 (LIS, we, us, our), a Corporate Authorised Representative (CAR) No. 1236821 of Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL No. 421445 (Lonsec Research). Any express or implied rating or advice presented in this video is limited to general advice and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person. Before making an investment decision you must consider your financial circumstances or seek personal financial advice on its appropriateness. Read the Product Disclosure Statement for each financial product before making any decision about whether to acquire a financial product.

Past performance is not a reliable indicator of future performance. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this video, which is drawn from information not verified by LIS. This video may also contain third party material that is subject to copyright. To the extent that copyright subsists in a third party it remains with the original owner and permission may be required to reuse the material.

The information contained in this video is current as at the date of publication. Financial conclusions, ratings and advice are reasonably held at the time of publication but subject to change without notice. LIS assumes no obligation to update this document following publication. This video is not intended for use by a retail client or a member of the public and should not be used or relied upon by any other person. This video is not to be distributed without the consent of LIS. Except for any liability which cannot be excluded, LIS and Lonsec Research, their directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this video or any loss or damage suffered by the reader or any other person as a consequence of relying upon it. Copyright © 2022 Lonsec Investment Solutions Pty Ltd.

You may not reproduce, transmit, disseminate, sell or publish this video without our written consent.

Markets were buoyed in July by data from the US suggesting that inflation may have peaked. All asset classes enjoyed strong returns and we saw a sharp rebound in segments of the market which were previously sold down on the back of inflation fears, such as the technology sector. During the month we observed a sharp reversal in short-term price momentum indicators which turned from red to bright green suggesting market sentiment had turned positive. So, is this the start of the next bull market or is it a false start and more pain is to come?

Despite the uptick in market performance, if we look at the facts, not much has changed. Inflation still remains high, the market continues to price in interest rate rises and there is evidence that the global economy is slowing. While we are starting to see some ‘green shoots’ in terms of the external drivers that have contributed to inflation showing some signs of easing, such as the improvement in global supply chains, the jury is still out as to the effectiveness of the current rate hiking cycle on controlling inflation. Since July the US Federal Reserve has reconfirmed their commitment to rate rises until they see clear evidence of inflation abating. Furthermore, we may see more aggressive quantitative tightening (QT), which in effect seeks to reduce central bank balance sheets to fight inflation. This has resulted in a resumption of market volatility. There are also the ‘X-Factors’ such as the conflict in Ukraine and the resultant pressure on energy prices, as well as the growing tensions between China and the West in relation to Taiwan. Both ‘X-Factor’ events are unpredictable and are contributing to the inflationary pressures we are currently observing.

We at Lonsec still believe that inflation will eventually peak and we may see central banks seek to reduce rates at some point in the coming 12 months as the economy shows further signs of slowing. The global economy is already showing signs of slowing with consumer sentiment falling, certain parts of the market such as construction under increased pressure, and indicators such as PMIs, while still broadly positive, showing signs of weakening. If central banks overshoot in their rate hikes the economic slow down will be more pronounced plunging world economies into a recession.

From a portfolio perspective, we have maintained our neutral asset allocation stance and continue to keep our portfolios relatively diversified. We expect more of the same in the coming six months with markets overreacting to short-term news, be it positive or negative, as markets try to navigate where inflation will land. We are continuing to look for evidence of inflation peaking and subsequent stabilisation of bond yields. Staffing remains an issue across sectors and companies are more hesitant in providing forward guidance. We are also closely watching company earnings. To date, companies have been able to pass on rising costs to the end consumer. However, the extent to which this will continue is yet to be seen.


IMPORTANT NOTICE: This document is published by Lonsec Investment Solutions Pty Ltd ACN 608 837 583, a Corporate Authorised Representative (CAR 1236821) (LIS) of Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec Research).  LIS creates the model portfolios it distributes using the investment research provided by Lonsec Research but LIS has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec Holdings Pty Ltd ACN 151 235 406. Please read the following before making any investment decision about any financial product mentioned in this document.

DISCLOSURE AT THE DATE OF PUBLICATION: Lonsec Research receives a fee from the relevant fund manager or product issuer(s) for researching financial products (using objective criteria) which may be referred to in this document. Lonsec Research may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec Research services.  LIS receives a fee for providing the model portfolios to financial services organisations and professionals. LIS’ and Lonsec Research’s fees are not linked to the financial product rating(s) outcome or the inclusion of the financial product(s) in model portfolios. LIS and Lonsec Research and their representatives and/or their associates may hold any financial product(s) referred to in this document, but details of these holdings are not known to the Lonsec Research analyst(s).

WARNINGS: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to general advice and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness.  If the financial advice relates to the acquisition or possible acquisition of a particular financial product, the reader should obtain and consider the Investment Statement or the Product Disclosure Statement for each financial product before making any decision about whether to acquire the financial product.

DISCLAIMER: No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by LIS. The information contained in this document is current as at the date of publication. Financial conclusions, ratings and advice are reasonably held at the time of publication but subject to change without notice. LIS assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, LIS and Lonsec Research, their directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.

Copyright © 2022 Lonsec Investment Solutions Pty Ltd ACN 608 837 583 (LIS). This document may also contain third party supplied material that is subject to copyright.  The same restrictions that apply to LIS copyrighted material, apply to such third-party content.

Important information: Any express or implied rating or advice is limited to general advice, it doesn’t consider any personal needs, goals or objectives.  Before making any decision about financial products, consider whether it is personally appropriate for you in light of your personal circumstances. Obtain and consider the Product Disclosure Statement for each financial product and seek professional personal advice before making any decisions regarding a financial product.