Wednesday 03 November 2021 by Joseph Kingsley Reviewing-asset-allocations-in-the-current-market At FIIG

Reviewing asset allocations in the current market

Earlier this year in February regular WIRE readers will remember I contributed an article on maintaining discipline with your asset allocation and investment strategy. As markets continue to push higher, volatility is once again with us as the drums signaling inflation are starting to be heard across the developed world.

In updating this theme, I once again stress the importance of maintaining a diversified investment portfolio and how a bond portfolio can continue to help investors pass the ‘sleep at night test’ when considering rising inflation.

In the last few weeks global markets have seen a range of inflation data printed from countries such as New Zealand, Australia and the US. The numbers whilst not a cause for major concern right now, given the COVID-19 induced slumber many economies have been suffering, nevertheless are at least a reminder to ensure you don’t have all your eggs in one basket.

As you will no doubt have read in the press and even from our other WIRE contributors, a rise in inflation was inevitable and expected given the Government induced stimulus and COVID-19 lockdowns, which have prevented normal functioning of developed economies and supply chains. As these developed nations re-emerge they are doing so when shortages in growth essentials, such as fuel, buildings materials and various commodities, are seeing rapid rises in price and the supply chains to get them to these destinations are congested at major hubs.

With unprecedented low interest rates having forced many investors to look for better returns out of defensive assets and cash, we have seen immense gains in existing growth assets and fueled booms in new ones like Cryptocurrencies.

Given all these moving pieces, I would suggest now more than ever is the time to maintain a disciplined approach in following your investment strategy and asset allocation. As I mentioned in February it is very easy to have your asset allocations skewed just by the movements alone in asset values of both equities and property. Adding further capital to these can move your risk profile considerably without realising.

Bond markets are currently challenging the Reserve Bank of Australia’s policy of yield curve control and no planned official rate moves until 2024, by staging sell offs at various points along the curve. The recent inflation numbers reinforced this selling and once again showed the need to have a balanced bond portfolio that will allow investors to take advantage of any future rate moves.

It is also worth noting that numerous corporate issuers over the last year have taken advantage of these lower rates by issuing longer dated fixed rate bonds. Whilst this has been a way to add yield to your bond portfolio its important for diversified portfolios they don’t get overweight in long-dated fixed positions. Even despite this recent volatility remember these bonds will repay capital at par come maturity and have mostly been investment grade rated credits.

Investors should ensure that they have an adequate spread of bonds, including Fixed coupon, floating rate notes and inflation linked bonds that can ride out any volatility we may experience.

I would encourage investors to ensure an adequate weighting of investment grade bonds, and where looking to add yield through some non-rated higher yielding exposures, know where your investment sits in the capital structure and the security you will have a charge against in any financial distress scenario.

In revisiting my article from February I remind investors:
“Whilst the conditions that led into the GFC were different, one thing I urge all investors to remember is that market ups and downs with occasional global shocks are par for the course and no matter what the conditions the key mantra to never lose sight of is maintaining an asset allocation in keeping with your own personal risk profile.”

We can expect ongoing market volatility, as inflation expectations and interest rate hike speculation reprice assets across the board. In particular, the wobbles that we’ve seen in equity markets that have been trading on the premise that yields would remain low for perpetuity has and will continue to impact the value of a share.

I believe the current gyrating interest rate environment will see some further corporate bond issuance and opportunities in the asset class, so for those with cash looking for investment and wondering if it might be best served in the equity market, just consider your current weighting to shares and have a discussion with your FIIG Relationship Manager about where you might benefit from further additions to your bond portfolio.