Andrew Lill: Absolutely well quarter one of 2018 saw the long awaited and much expected return of volatility to all markets, both bond, equities and other parts of the asset class curve. So, the year started off in January with one of the strongest rises in the S&P 500 driven by expectations of further earnings growth of the technology firms and price earnings multiples increasing. We then had a bout of volatility which basically impacted certain trading patterns that were based on low volatility in markets. We had some – the first two weeks of February with the market down. Market then rebounded back to where it started at by the end of February. And really throughout March we’ve had the impacts from the macro side of potentially negative influences of trade wars or trade imbalances. And then the reality of some of these very highly priced technology companies starting to see some of their gloss coming off with the latest one being Facebook.

So, I think overall we'll see kind of the market being broadly around where it started if not a bit further down and most yields sort of bond markets, yields have risen and bond prices have therefore fallen. So probably for the first time we've seen both equity and bonds falling price for the quarter.

Inflation or indeed inflation expectations are really the glue by which all asset classes both equities and bonds work. And when inflation expectations tend to go higher than what was previously expected then you tend to have volatility or concerns over equity and bond valuations. Now the thing is that over last 10 to 15 years inflation expectations have generally been coming down. First of all because imports were sourced from China at lower prices. And then the impact of the central banks has been driving inflation down.

Now we think we see kind of the change in that, that we've seen the bottom and we see kind of inflation rising from here. And that is likely to be very troublesome for both traditional equity U.S., Australian equity markets and traditional bond markets like government bonds around the world. Multi-asset investing tries to look past those traditional asset classes to make sure that in all environments we can be sure of meeting an inflation plus return, over a 5-year period, but with something in every environment there to basically insulate the portfolio. And an actual fact for most Australian multi-asset portfolios the first quarter has seen foreign currency being the major insulating asset. So, because if you have foreign currency in your portfolio then most multi-asset portfolios this first quarter of the year will show positive returns despite equity and bond markets being down.

We have no forecast or expectation for interest rate, at the short end, so, cash rate increases in Australia this year. We think that the multi-cycle and the economic cycle in Australia are slightly different to where it is in most of the other developed markets. So, if you think about sort of the impact of the GFC on the U.S., European markets and Japan than really they sort of suffered very hard after the GFC. So, central banks cut cash rates very hard after that point and at this particular point they are actually starting to sort of to raise from very low levels.

For Australia, obviously, the resources boom kept us going past the GFC and then the more recently the residential housing boom. And it's really only now that some of the key tailwinds are starting to fade from Australia and we think that the Reserve Bank of Australia will continue to try and stimulate the economy by keeping interest rates low for the foreseeable future.

At Morningstar Investment Management we are long-term valuation driven investors focused on fundamental earnings. What that really means is that over longer term, which we think is an economic cycle probably between 5 and 10 years then share prices do tend to go in lockstep with earnings growth. However, in the shorter term anything less than three years, the direct link between earnings growth and share prices is quite broken, is not direct. And the missing piece really there is valuation; that if you start off with a period of equity markets already being quite expensive as we saw that they were at the start of the year, then they are already factoring in high earnings growth.

So, if you therefore get high earnings growth, all that will happen is those equity prices will stay constant. As valuations change then what we are really looking for is markets where an earnings growth factored into prices is low but the potential for earnings growth to be above consensus or trend is high. That’s where you tend to get the real changes in investment prices and thus consensus related to be invested in more contrarian or unpopular markets.