Article provided by Chris Lioutas – PSK Chief Investment Officer
For the last 12 months, markets have been solely driven by macroeconomic factors and events, which can happen over short periods of time. This means that markets are far removed from the fundamentals which normally drive returns over the medium to longer term.
This can be best surmised by Benjamin Graham, arguably the father of value investing, who said that – in the short run, the market is like a voting machine (tallying up which firms are popular and unpopular); but in the long run, the market is like a weighing machine (assessing the substance of company).
Your portfolios have been built with a strong focus on fundamentals given the greater certainty and comfort we have here. Whilst we have some regard for the macroeconomic environment in which we operate in, building and managing a portfolio based on short-term and usually quite sharp shifts in macroeconomic sentiment can be problematic. Trying to predict when to invest specifically is rarely correct and is why we believe in time in the market and not timing of the market.
Markets are focused on 3 issues right now –
- Global Inflation and Central Bank reactions
Are we heading towards a sharp recession or is this something that will moderate in the short term. The world is watching the Fed.
- Global Supply Chain Challenges
What are the impacts of China’s response to COVID and what does this mean for global supply
- Geopolitical Tensions
How does the current Ukraine/Russia war and the heightened tensions with China/Taiwan and Asia Pacific region in general impact the financial markets in Australian and abroad?
Market movements on a weekly and sometimes daily basis are being driven by sentiment shifting between a benign environment ahead whereby current high levels of inflation fall quickly and most of the central bank heavy lifting has been done versus a more adverse environment where central banks have to raise rates considerably more and hold them at higher levels for longer in order to crush demand and bring inflation under control.
Given recent changes in data, we think the benign environment is more likely but without a crystal ball it’s almost impossible to tell right now. That’s because we’re operating in an environment where we’re all dealing with the after-effects of 2 years of pandemic lockdowns, some of the biggest fiscal and monetary policy stimulus the world has ever seen, supply chain repair, a war in Europe with global energy implications, all whilst the world’s 2nd largest economy continues with covid-zero policies, that continues to disrupt global supply. An unusual combination of issues to say the least.
As such, portfolio settings are currently balanced between the medium to longer term focus on companies with strong fundamentals that are likely to come out of this period in a stronger position with consideration for a benign macroeconomic environment in the short term. We’re closely monitoring prevailing conditions and data points, and remain ready and able to adjust portfolio settings if the more adverse environment plays out.
As always we will continue to monitor the markets and keep you informed.
If you’d like to discuss any of the points raised, please do not hesitate to contact us on 9324 8888.
