Markets have started to focus attention upon the implications of a significant rise in the cost of capital. As a result, we have maintained some degree of defensiveness in portfolios. The good news is that we are likely close to a peak in short term interest rates. The deeper questions are, how will the economy progress in this new regime and to what extent will central banks be able to ease their policies. There remains a reasonable possibility of a recession in the US and Europe along with some potential for dislocation around some over levered private equity investments, mark to market losses on securities portfolios held on the balance sheets of US regional banks and the refinancing of commercial mortgage back securities.
Whilst macroeconomic analysis is an important risk management tool, as investors we remain acutely focused on the valuation of markets. We see the degree of dispersion in valuations across sectors and asset classes highlighting some attractive investment opportunities. Due to the degree of uncertainty in the outlook we remain well diversified and liquid in our portfolios. We have started to orientate portfolios towards areas where we see value, including Japanese equities, global midcaps, further investments in credit, and a reduction in allocation to both Australian equities and AREITs.
KEY POINTS
• Interest rate rises have begun to weigh on some areas of the equity markets warranting our cautious disposition.
• Whilst we remain well diversified, with meaningful degrees of liquidity in portfolios, we have started to take advantage of some attractive investment opportunities.
• High levels of dispersion in the valuation of equity markets by geography and market capitalisation. This has presented some excellent investment opportunities and has been an impetus for our portfolios to change their exposures.
• Our focus on harvesting yield remains and we plan to allocate further capital to credit in the period ahead as this asset class is priced attractively.
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