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Personal Finance

Does your portfolio need a spring clean?

Investors need to rethink their portfolio rising inflation and a challenged outlook. 


“Generating wealth above inflation is the key for any investor,” Morningstar CIO Matt Wacher reminded delegates at the recent Morningstar Investment Conference for Individual Investors.

With inflation ticking upward, it is now a hot button issue for any investor. Another key reminder was that markets are not static. While investors were able to generate a decent inflation plus return, the challenged outlook will mean investors will need to re-look at their portfolio and assess what is “under the hood”.

“Markets are not static, so why should portfolios be,” Wacher said. With this mindset, investors are better equipped to uncover opportunities.

Time for bonds?

There is now an alternative to equities, according to Wacher. Highlighting the graph below, Wacher notes that expected returns for bonds have significantly improved relative to equities.

Importantly bonds also remain a key diversify in an investor’s portfolio. However, investors should look at their own goals as Morningstar's recent article on investing in bonds argued

“Bonds have always provided that diversification and with yields now above 4%, bonds can now play an important role in improving the robustness of portfolios under various economic scenarios.”

Additionally, this asset class has historically performed well during a recession, and with an economic slowdown on the cards, bonds could provide this necessary ballast to equities.  

Chart 1: Government bonds and diversification

Returns during recessions

What about equities?

For Wacher, equities remain expensive but if “we look beneath the hood,” there are some opportunities in financials and consumer staples. Here, it is best to look offshore, but while the US market is going to give investors a positive return, these returns are not exactly “the best”, notes Wacher. Instead, he sees opportunityamong assets outside the USA with emerging markets, UK, and Asia ex Japan expected to deliver the most attractive returns.

Chart 2: Expected real returns for key markets

Asset class valuations

A little slice of emerging markets

“We think that emerging markets and particularly China is going to give you a great expected return,” Wacher says.

“Obviously there is significant risks in these markets, but it may be worth having a little slice of your portfolio in emerging markets.”

Valuations are key, and with a bearish sentiment in China, there are some well-priced opportunities. “Over the long-term Chinese equities are anticipated to generate excess returns against broad emerging markets, predominately drive by earnings reversion.”

In particular, Wacher likes Alibaba – effectively a “Chinese Amazon”.

Again, there is bearish sentiment on the stock – investor concerns include a regulatory crackdown in China in 2021 as well as unease over the macroeconomic outlook for the region.

“We think Alibaba’s valuation has been over-penalised and presents an attractive reward for risk opportunity.”

As Wacher highlighted earlier, there are risks considering including the property woes in the country, following high-profile collapses. However, for Wacher a lot of this risk has already been priced into these assets.

To hear more from Matt Wacher please listen to our recent episode of Investing Compass.



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