Global Outlook & Strategy

The title for this edition of the Global Outlook and Strategy publication is Selectively Bullish.

We continue to have a positive disposition towards growth assets with international equities, infrastructure, property and credit being favoured. Our position remains underweight the
Australian equity market on high valuations (when compared to global markets) and only modest earnings growth. We believe that to be responsible in this positive risk posture that it is important to lean into diversification now and this includes retaining our exposure to gold within portfolios. During the quarter we have continued to reshape the underlying exposures within international equities, so that we have moved to be modestly underweight the US market (where valuations are high in the large capitalisation and technology stocks
and ongoing performance depends upon double digit earnings growth). We have repositioned towards those equity markets with more reasonable valuations (than US large capitalisation companies) including Japanese, Emerging Market, European and Midcap equities. The added benefit here is that earnings expectations have continued to improve for all these markets. We will continue to keep a sharp eye on the risks at hand in the period ahead.

KEY POINTS
• Financial markets had a positive quarter across equity and bond markets as the solid foundations in the global economy provided support.
• Equities were supported by a positive backdrop for earnings across a range of geographic regions. Strong performance was seen in Emerging Markets, Technology stocks in the US and Asia, and Japan. Investors sought to begin the process of reallocating away from the US following a period of ‘US exceptionalism’.
• Central banks maintained a supportive footing with numerous reducing interest rates (US, Australia, New Zealand, Europe & several Emerging economies) and in the case of the Bank of Japan maintaining a loose policy stance.
• Bond markets generally performed positively in anticipation of easing from central banks, with high real yields attracting investors.
• The concerns that abounded around topics including rising government debt and trade policies were generally reflected in the appreciation of the safe havens of gold and through the depreciation of the US dollar as investors looked to diversify.
• We continue to emphasize the attractive opportunity to diversify portfolios by equity market, currency exposure and asset class. In the equity market the lower valuations in Emerging Markets, Japan and Europe are accompanied by robust levels of earnings expectations, that make diversifying into these markets historically attractive.