Summary of key points


  • The key issues for investors to consider are:
    • Inflation and why it is persistently so low? – We think it will average between 2.0% p.a. and 2.5% p.a. in Australia over the next ten years.
    • The likely path back to normalised monetary policy by the world’s central banks. We think it will be very gradual over the next five years, with the US leading and Europe and Japan lagging – so bond yields will be low enough to support equity prices for some time to come but will eventually put pressure on equities if US bond yields rise above 4% p.a.
    • The continued calm in world equity markets and whether turmoil will return in the near future. On balance we think that low volatility is more likely than not to continue over the next 12 months- but there are some potential triggers for a short term sell off.
    • The consolidation of power by Xi Jinping in China at the recent 19th Party Congress and what this may mean for economic growth in China and the entire world as well as commodity prices and equity markets. We think that it means a significant but controlled reduction in credit growth, slower GDP growth which is still strong by world standards and more significant constraints on coal and iron ore prices.
  • There are risks of a shorter-term sell off in the months ahead. If this happens, the next likely move is to go overweight equities on weakness, although the prospects of prolonged weakness would also need to be carefully appraised.
  • Notwithstanding the shorter-term risk factors, it is still appropriate to hold a neutral or benchmark allocation to Australian and International equities using a longer-term perspective. This is mainly because record low interest rates are sustaining equity valuations and will do so until bond yields have increased by more than 1.5% p.a. Our valuation work, combined with our assessment of the momentum and qualitative factors, supports this judgment.
  • Bond yields are expected to rise by 1% p.a. to 1.5% p.a. over the next two years. Therefore, in the defensive or stabilising part of the portfolio, there should be an underweight to fixed Interest combined with a shorter duration position in fixed interest. In addition, given the low spread or margin available for taking credit risks, the exposure to credit risk should be very limited.
  • The possible adverse impact of rising bond yields on listed property trusts also indicates a significant underweight to this asset class.
  • A modest overweight to alternative equities, which target an absolute return higher than cash or fixed interest would be helpful in stabilising portfolio returns without giving up too much in return.


Sign up to receive our latest news

  • This field is for validation purposes and should be left unchanged.