Australian Equities 

We believe there is more likelihood of better offshore equity market performance in the US and other developed markets, primarily due to a slowing path of growth and fewer growth-oriented industries and companies. A weaker consumer in Australia weighs on equity earnings as the combination of higher inflation and floating rate debt restricts consumer spending. China linked equities, in particular commodities are not expected to perform as well while China lacks the broad growth impetus as stimulus measures are not gaining traction and the real estate sector remains depressed.  There is a further headwind emerging recently with the probability of an RBA rate hike rising. This is an additional negative for consumers and businesses, and the valuation of equities. We expect a readjustment of expectations in the upcoming August reporting season as the health of companies and their forward-looking conditions are assessed.  

International Equities 

International equities have performed relatively well, particularly the US larger cap stocks where leadership has narrowed as earnings upgrades have powered their strength. The leadership narrowed further, even amongst the ‘Magnificent Seven’ where Nvidia has grown to briefly become the highest market value company in the world, boosted by the AI thematic.  While we do see some value in US small and mid-caps and in ex-US equity markets, we are also conscious that earnings have not been upgraded as much as larger companies and corporate cash balances are not as high.  We recognize that there has been very good performance in international equities since October last year, and view performance for the next 12 months may not be as great as the previous 12 months.  However, we do expect an outperformance of international equities relative to Australia.  

Fixed Income 

Bond markets have been moderately volatile as the path of growth, inflation and cash rate policy settings are continually reassessed. Sticky inflation has biased bond yields on the high side for some of the last year, however as inflation has come down, bond yields have as well. As bond yields fall, the value of bonds rises. Inflation has been persistently around the 3% level for the last year, while Australian monthly inflation has moved up from recent lows.  We expect the RBA is more likely to hike cash rates rather than cut in the near-term, which may reprice Australian bonds further lower. The US Federal Reserve may be more biased to hold cash rates higher for longer before cutting later this year to lean against inflation.  On the corporate bond side, there has been significant flows into credit markets that have supported corporate bond prices and driven credit spreads lower.  If we do see further weakness in growth while inflation remains on the low side, the likelihood is of some diversification from price drivers of government bond yields down while credit spreads rise during a slowdown or recession.

Overall, we see some protective role of fixed income markets to return if equity markets sell off. 

Tactical Asset Allocation

Fundamental - Neutral	Economic fundamentals are deteriorating but remain solid globally, but the domestic outlook is more challenged. This is seen through some weakening in leading indicators such as forward orders in the NAB Business Survey while the Westpac Consumer Sentiment survey remains at deeply pessimistic levels.  Inflation remains above targets for Australia and the US, keeping central banks on hold with the Reserve Bank of Australia potentially having to hike again as inflation has started to trend higher again in recent months. The lack of a substantial recovery from China adds to the lackluster domestic outlook. We expect a less positive economic backdrop for the rest of 2024.
Valuation - Moderately Negative	Valuations in equity markets have continued higher, driven by the AI thematic. The Australian equity market has lagged the US market due to a lack of technology leaders. This can be seen in earnings revisions where the US has seen upgrades since the start of the year, while Australia has seen downgrades. At the headline level, valuations are above historical averages but there is a wide dispersion of valuations with mid and small caps at cheaper valuations than very large stocks.
Technical - Neutral	Investors have been adding to equities and positioning is overweight amongst US retail investors. Institutional investors also have a decent overweight to equities and underweight to cash. Sentiment across both segments of the market also remains bullish but not yet at historical extremes that signal an imminent correction. Market breadth has also narrowed significantly to a small cohort of leaders, driven by the AI thematic. This is usually an unhealthy sign for markets. With investors starting to look overinvested in risk assets, we are wary of an elevated risk of a short-term correction.
Overall view for growth asset classes	Our net scorecard view is neutral for equities, riskier credit and growth asset classes leaning to slightly negative. After a strong first half of 2024, we see economic growth slowing in the US, partly offset by early signs of a recovery in Europe, with Australia at greater risk. We do not expect significant rate cuts from central banks in 2024, while valuations and positioning pose headwinds to equity markets. As a result, we have trimmed our equity exposure to bring our overall positioning back to neutral for our model portfolios. Looking ahead the US election may drive volatility higher in the coming months which could provide potential opportunities.

 

Portfolio Positioning

 

 

This information is general in nature and is provided by Partners Wealth Group. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.