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Fundies, advisers overweight equities despite inflation, rate rise risks - Firstlinks newsletter

Graham Hand  |  17 Jun 2021Text size  Decrease  Increase  |  
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Despite lofty valuations, a higher than expected 5% annual inflation rate published last week in the US and new strains of the virus, fund managers and financial advisers are increasingly weighting portfolios to equities. Each month, Bank of America publishes a Global Fund Manager Survey, and for June 2021, BofA found asset allocators (AA) are:

" ... bullishly positioned for permanent growth, transitory inflation and a peaceful Fed taper via longs in commodities, cyclicals and financials”.

At the Morningstar Investor Conference (MIC) last week, mainly comprising over 500 financial advisers, only 16% were reducing their clients' exposure to Australian equities, while many were increasing in value and core strategies.

When asked at MIC about their biggest concerns, most cited valuations and inflation risk, with few worried about COVID. How quickly we move on.

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It was the same in the BofA fund manager survey, with 66% nominating their biggest tail risk as either inflation or a taper tantrum (that is, the market reacting badly to central banks withdrawing support).

It's an unusual combination of allocating more to equities amid high concerns about inflation and rising rates. A record number of companies are mentioning inflation in the market updates they give during their earnings outlooks.

A good example of rapidly rising costs is container shipping spot rates. The vital trade route from Shanghai to New York shows supply chain disruptions and an accelerating upward trend in shipping costs. As trade reopens, higher demand for oil will be another factor which tests whether inflation is really 'transitory'.

While on inflation, we should acknowledge a moment in history which shows the merit of government spending on productive assets at the moment. For the first time ever, the Australian Government paid a negative interest rate of minus 0.01% on part of $1 billion borrowed from institutions last week. At some point, debt needs to either rollover or be paid back, but it's certainly cheap while it's out there.

Damien Klassen recently published an exhaustive 7,000 word, four-part review on his inflation expectations which he has summarised into a shorter article for our purposes. He concludes that the investments that might protect a portfolio from inflation have already had their run and current high inflation is supply-chain based and temporary.

In this week's lead, Dawn Kanelleas identifies five companies in her portfolio that she holds based on the outlook over the next five years, not because she is jumping aboard some prediction about a COVID recovery.

Then Greg Lander checks the performance of a wide range of LICs and LITs between the previous peak in January 2020 and the end of March 2021. How well did they manage the rapid fall and recovery in a sector that has some strong results despite the recent criticisms?

Rudi Filapek-Vandyck identifies a stock market segment that has delivered excellent results recently, away from the headlines. He says it would be front page news if achieved in other parts of the market.

Then two articles on important subjects not receiving enough attention. Bill Pridham highlights the terrible impact of single-use plastics on our environment, and how regulations will hit some companies. He has invested in one business that is confronting the issues. And Will Baylis defends the rights of fund managers to use the research of proxy advisers and he argues the Government's desire to stamp out their infuence is going too far.

Finally, like the market, we can't leave the inflation genie in the bottle. Stephen Miller asks what it will take for the RBA to change its highly accommodative stance on bond purchases, interest rates and lending to banks.

The White Paper from Perth Mint is a detailed review by Jordan Eliseo on the role gold can play in diversified superannuation strategies based on market data and super funds across the risk spectrum for almost 30 years.

We had a lively debate (36 comments so far) on Emma Davidson's article about declining fertility but our favourite Comment of the Week came from Simon (Luke Skywalker) Samuel who joined in the spirit of our comparison of LICs and ETFs with Marvel and Star Wars, writing:

"No one is going to be unhappy buying an asset for 80% of its value and collecting outsized yields as a result. The problem is that unless you are Palpatine (the Emperor of the Galactic Empire who seemingly lives forever) and so don’t ever need to sell those LICs, you are only going to get 80% of any capital appreciation the underlying fund investments make until such time as the discount narrows meaningful. Most of the time, you need to be rescued by activists (the Force) to be able to crystallise the full capital gain. Don’t forget that in the beginning, a long long time ago, those first investors in LICs paid 100% or more for those investments, and those people are not best pleased to be faced with having to sell at 80% of the value when they or their estate trustees need to sell out."

Finally, the power of a healthy celebrity and a viral clip. Watch what happens when Cristiano Ronaldo pushes away two bottles of Coke during a press conference. It wiped billions from Coke's market value. Warren Buffett will not be pleased.

is the editorial director of Morningstar Australia.

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