Should I be invested in fixed interest?
Fixed interest markets have delivered low or negative returns globally over the past twelve months. We expect interest rates will continue to drift higher this year. That will be a challenge for near-term returns. But yields have moved higher and that has improved the medium-term return prospects. Our return expectations for US and Australian sovereign bonds has increased, while investment grade and high yield credit returns look reasonable relative to history.
Fixed interest remains an important part of a diversified portfolio. Sovereign bonds provide some of the only reliable downside protection to retail portfolios during market downturns. While we moved to be maximum underweight sovereign bonds during mid-2021, we have retained some exposure from a risk management perspective.
Alternative credit may be an option for some investors. This typically means taking on some illiquidity and credit risk in return for higher yields. The Portfolio Advisory Service is able to help with these allocations.
Can equities recover from the poor start to this year?
Global equities have suffered as interest rates have moved higher and uncertainty has increased. A rotation out of growth and tech stocks has been painful for most portfolios. We think solid earnings growth this year will help equity markets recover – making the recent price action a correction rather than a deeper bear market.
Diverging monetary policy and economic growth will be important for equity allocations. In January, we changed our outlook for global equities to favour Australia and Asian equities over US and other developed market equities. We continue to expect those markets to outperform over the medium-term.
What actions should I take in my portfolio?
Market volatility is a challenging time for investors. It is important not to take knee jerk reactions that are not aligned with your investment process or philosophy. At the same time, reviewing exposures and holdings when markets move is sensible. The recent price action may be a good reminder to rebalance if the strong equity returns in 2020 and 2021 have moved the portfolio away from the strategic asset allocation. For portfolios that are dynamically managed within a managed account structure, the volatility is a reminder to review dynamic positions and ensure the underlying thesis remains sound.