For the last 12 months, markets have been solely driven by macroeconomic factors and events, which can happen over short periods of time. This means that markets are far removed from fundamentals which is what actually drives returns over the medium to longer term.
This can be best surmised by Benjamin Graham, arguably the father of value investing, who said that – in the short run, the market is like a voting machine (tallying up which firms are popular and unpopular); but in the long run, the market is like a weighing machine (assessing the substance of a company).
Your portfolios have been built with a strong focus on fundamentals given the greater certainty and comfort we have here. Whilst we have some regard for the macroeconomic environment in which we operate in, building and managing a portfolio based on short-term and usually quite sharp shifts in macroeconomic sentiment can be problematic and is not something we and most others profess to have any unique or specific advantage in.
Markets are focused on 3 issues right now
Market movements on a weekly and sometimes daily basis are being driven by sentiment shifting between: a benign environment ahead whereby current high levels of inflation fall quickly and most of the central bank heavy lifting has been done; versus a more adverse environment where central banks have to raise rates considerably more and hold them at higher levels for longer, in order to crush demand and bring inflation under control.
Given recent changes in data, we consider the benign environment is very possible but without a crystal ball it’s almost impossible to tell right now. That’s because we’re operating in an environment where we are all dealing with the after-effects of 2 years of pandemic lockdowns, some of the biggest fiscal and monetary policy stimulus the world has ever seen, supply chain repair, a war with close proximity to Europe with global energy implications, all whilst the world’s 2nd largest economy continues with covid-zero policies. An unusual combination of issues to say the least.
As such, portfolio settings are currently balanced between the medium to longer term focus on companies with strong fundamentals that are likely to come out of this period in a stronger position with consideration for a benign macroeconomic environment in the short term. We’re closely monitoring prevailing conditions and data points and remain ready and able to adjust portfolio settings if the more adverse environment plays out.
We remain comfortable with the portfolio settings and allocations; and available to discuss your personal position at any time.
The Australian equity market started the year with great gusto with key economic metrics broadly supporting the market. This swiftly turned in February and the local bourse continued to fall throughout the remainder of the quarter. The slide was largely due to the uncertainty over US President Trump's tariffs. Fear and speculation finally became reality as the index began its steep decent in early February, falling circa -10.3%; an official correction and potentially heading towards bear territory and global recession. The Australian market reacted sharply and negatively to the Trump tariffs during the March quarter and overall experienced its steepest losses since the onset of the COVID-19 pandemic. The Australian equity market ended the quarter down (-2.8%).
Although we haven’t received any calls, as we suspect most people are quite familiar with market volatility over the years, we thought this update would put some recent market movements into perspective.
It was a nervous start to the quarter for the Australian equity market (ASX 200), as the impact of China stimulus measures and implications of rising bond yields was being digested. The resources sector felt the brunt of this nervy start falling over 5% for the month of October, however the broader market did manage to reach an all-time high on the 15th of October closing above 8,300 for the first time.