As we bid farewell to the first half of the year, inflation and unfortunately war in Eastern Europe are dominating headlines. This has led to increased talk and actions from the Reserve Bank of Australia and US Federal Reserve to raise interest rates rate hikes and dampen the desire by consumers to spend.
It has also left investors wondering how to navigate the uncertainty created.
In combination, the change in tact by central banks means companies will experience a faster return to higher short-term borrowing costs, which could cause market volatility and earnings per share (EPS) slowdown. Inflation is likely to reduce to moderate levels by the end of this year, but there is a risk that it stays higher for longer.
Despite an inflationary environment, we believe the early-cycle snapback from Covid-19 is complete, and we are entering the second half of the year with a positive market outlook. While we see a lot of opportunity for investors, but it is a year once again filled with volatility - so it’s important to keep a few things front of mind when building your portfolio.
Here’s our top 5 tips
- Review your portfolio – We expect global equity returns in the high single-digits, as returns are moderating against the headwinds of global uncertainty. We are gradually rebalancing towards less cyclical, high quality / defensive assets in a more conservative environment. Some sectors investors may want to consider are healthcare, both locally and globally, consumer staples, and non-cyclical technology sectors, such as the five global leaders in the tech sector (Facebook – now called Meta – Amazon, Apple, Netflix and Google – now called Alphabet – collectively they are known as the known as FAANG stocks), which have strong balance sheets and EPS growth history.
- Stay invested, focus on the long game – Short term pull backs occur and are frequently followed by strong periods of recovery. Missing the 10 best days of the market will significantly reduce your overall long-term return. Investors need to think long-term and not be spooked by the latest attention-grabbing news headline. Do not let your emotions cause you to panic. The recent correction is a reminder that risk and reward complement each other.
- Cash is not King - Cash can be a big drag on your portfolio, particularly in a low interest rate environment, and after inflation and taxes. Since 1945, there has been economic expansion in 86% of all months, highlighting it is smarter to stay invested and grow wealth than hold cash.
- It’s all about goals – Understand your risk appetite and match your investments to your personal goals. Low interest rate environments have pushed investors to riskier asset classes. It is important to consider your risk tolerance and investment horizons when planning your long term financial and personal goals. Review your asset allocations as recent equities gains may have increased your concentration in riskier assets.
- Follow the golden rule – Diversification remains the best line of defense to manage market turbulence. Invest across multiple asset classes and consider a spread of assets across different geographic markets and themes.
This year is likely to have stable but slower, economic growth, characterised by increased headwinds and volatility as the markets look beyond easy financial conditions in a post pandemic world. We believe that seeking sustained returns this year requires greater exposure to more defensive sectors, quality firms, and dividend growth strategies. For investors, there is strong opportunity to review, reposition, and further diversify portfolios as governments, communities, and economies embrace the ‘new normal’.
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Any advice is general advice only. It was prepared without taking into account your objectives, financial situation, or needs. You should also obtain and consider the relevant Product Disclosure Statement and terms and conditions before you make a decision about any financial product. Investors are advised to obtain independent legal, financial, and taxation advice prior to investing. Past performance is not an indicator of future performance.