Archive for category: News & Insights

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.

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.

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[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.