It’s a challenging time for asset allocators in the current environment, which has seen asset prices and market sentiment shift quickly on the back of a single tweet. Markets in July were generally strong across most assets, but August has seen a re-emergence of trade tensions between the US and China. More importantly we have seen the yield curve invert with the 10-year US treasury falling below the 2-year treasury for the first time since 2007, which, as you may recall from the text books, has historically been an indicator of economic weakness.
In an environment where markets can rapidly change tack it is important to have a framework to anchor your asset allocation process. At Lonsec we focus on asset valuations, the market’s position in the business cycle, and other factors such a liquidity and sentiment. In the current environment we continue to seek diversifying assets such as alternatives and from a bottom-up perspective we seek investments that have the mandates to perform in different market conditions. This will become increasingly important in a market that may be potentially more volatile than we have seen in recent years and where it is difficult to have clear line of sight of the geopolitical conditions and the extent to which central banks will continue to prop-up markets in the future.
From an asset allocation perspective our main active positions remain an underweight position to Australian equities and a positive tilt to listed infrastructure and alternatives. Asset price returns in recent years have been well in excess of our long-term expectations, which has been a positive outcome for clients. We believe that the environment going forward will be more challenging with asset valuations generally within the fair to slightly expensive range and business cycle indicators trending down.