Australia Strategy: Asset Allocation update – Q2 2021

About the author:

Andrew Tang
Author name:
By Andrew Tang
Job title:
Analyst - Equity Strategy
Date posted:
31 March 2021, 5:00 PM
Sectors Covered:
Equity Strategy and Quant

  • The tug of war between stronger economic growth, inflation and higher bond yields will guide asset allocation in 2021. We see the rapid rollout of the COVID-19 vaccine, accommodative monetary policy and additional fiscal support as underpinning risk assets over the next 6-12 months.
  • We maintain an overweight position to Equities favouring sectors (see Morgans equity sector strategies) and regions at the epicentre of the pandemic. We are neutral real assets (property and infrastructure) and maintain our underweight position in cash and income assets. Refer to page 2 for our asset class views.

Positioning for cross-asset and intra-asset rotation

Although the incoming global economic data is likely to remain poor until around mid-2021, we forecast that risk assets will continue to outperform defensive ones comfortably over the next couple of years.

We also anticipate this will be accompanied by a further rotation within risky asset markets – generally favouring the sectors and regions hit hardest at the start of the pandemic.

We also expect continued weakness in the US dollar (refer to our recent note). The two key risks to these forecasts are:

  1. The pandemic takes another turn for the worse over the northern hemisphere spring and a vaccine still takes a long time to develop, produce, and distribute.
  2. Policymakers withdraw support prematurely, undermining the economic restart and the prospects for risky assets.

A restart rather than simply a recovery

We see the path out of the COVID-19 shock as a “restart” – not a typical business cycle “recovery”. The key reasons are the distinct nature of the shock, broad-based pent-up demand and different inflation dynamics.

The passage of the US$1.9trn fiscal package and an accelerating vaccination ramp-up in the US and Europe magnify these factors, and we believe the restart will likely be stronger than markets expect.

The restart bolsters our pro-risk stance over the next six to 12 months, and makes us lean further into cyclical assets. We are overweight equities, and our preference is for small caps given their lower relative valuations and leverage to domestic activity.

We see opportunities in emerging market (EM) equities, and see the recent sell-off as an opportunity. We still expect EM equities to benefit from a global cyclical upswing, supported by a weaker USD.

Elsewhere we are neutral real assets (property and infrastructure) as we see them offering some insulation against rising inflation down the road.

An overweight exposure to commodities is also supported by several drivers including:

  • Improving demand in-line with the postpandemic economic activity
  • A resilient Chinese economy
  • Genuine supply-side constraints influenced by capital discipline among the majors producers
  • Growing investor recognition of inflationary forces
  • Expected USD weakness.

Spotlight on ESG

Investors in today’s markets need to understand the impact ESG is having on investment returns and portfolio construction.

From an investing perspective, the past couple of decades can broadly be defined around the secular themes of BRICs in the 2000s and most recently FANGs.

We expect Environmental, Social and Governance themes (ESG) to be an acronym for the 2020s as social trends drive changes in consumer, corporate and investor behaviour. In this update, we include some listed options for investors looking for exposure to clean energy and leading responsible companies.

Find out more

Download full research note

If you would like more information, consider reading Investment Watch Autumn 2021. In this edition, we update our asset allocation settings, outline what the economic restart means for key industries, discuss why bond yield must go up and more.

Otherwise, please contact your adviser or nearest Morgans office.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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