Look to infrastructure to navigate ‘late cycle’ markets

Global markets are entering a ‘late cycle’ phase, as demonstrated by interest rate cuts by the Reserve Bank of Australia (RBA) and the US Federal Reserve, according to RARE Infrastructure.

The Fed cut rates by 25bps in mid-September for the second time this year while the RBA cut them three times this year to 0.75%.

As well as concerns about interest rates, valuations for global equities had only been this high twice in the past 100 years.

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‘Late cycle markets’ were typically characterised by slowing growth and increased market volatility.

Nick Langley, RARE co-founder and senior portfolio manager, said: “US-China trade tensions, Brexit, Hong Kong protests and anaemic growth in the Eurozone where quantitative easing is again on the front burner, are all issues that contribute to global uncertainty and the late-cycle narrative.

“On the interest rate front, the Fed felt the need to drop rates again in September, only a month after its first reduction since December 2015. Looking at global equities, now is just the third time in the past 100 years in the US that equity valuations have been this high (if you consider Shiller CAPE for the S&P 500.) These are two strong arguments for a late-cycle view.”

The firm suggested infrastructure could be an alternative way for individuals to add downside protection to their portfolios.

“We believe this is a time when select listed infrastructure can significantly fortify an individual or SMSF portfolio on the basis that certain infrastructure assets can be shown to offer significant downside protection while capturing much of the upside.”

Since being launched to the Australian market on 1 March 2019, the RARE Infrastructure Income fund has returned 9.7% versus returns of 10.3% by the ACS Equity-Infrastructure sector, according to FE Analytics.

Performance of RARE Infrastructure Income fund versus ACS Equity-Infratstructure sector since 1 March, 2019.

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