Time to keep portfolios defensive: Pendal
Investors should be tilting portfolios towards cash and inflation-linked assets to help shore them up against rising inflation, according to Pendal multi-asset chief Michael Blayney.
Offering a snapshot of the major asset classes, Blayney argued that many key equity markets remained overvalued even after the broad-based sell-off that cast a shadow over 2022’s opening five months.
Given the deteriorating macroeconomic backdrop, he suggested it could be appropriate to take an underweight stance on the stockmarket.
Large-cap US shares, which were the clear leaders of the decade-long bull market that followed the Global Financial Crisis but had sold off aggressively more recently, still looked expensive, he said.
At the other end of the spectrum, Chinese stocks are cheap but Pendal remained cautious on them because of a deterioration in earnings and COVID-19 lockdowns.
“We continue to prefer better-valued markets such as the United Kingdom and Japan, and rotational themes such as value/small cap,” Blayney added.
On government bonds, the multi-asset manager noted that yields had climbed in recent months and now appeared to offer better value than they had in recent years. However, they still faced a significant headwind from inflation.
“Where possible, we have a preference for inflation protection and Australian exposure within portfolios,” he explained.
He also suggested portfolios retained some exposure to duration – or sensitivity to interest rate changes – to add to their defensiveness. However, he added that duration exposure should be less than usual, given the likelihood of more rate rises.
In credit markets, Blayney saw the best value in investment grade bonds while high-yield debt currently offered limited reward for risk, although it could be attractive on a more tactical basis.
Finally, the Pendal manager said there were select opportunities in listed infrastructure securities, which were seen as a classic inflation hedge by investors.
However, he considered global real estate investment trusts to be expensive, particularly considering higher bond yields and rising interest rates.
All of this meant investors should consider a defensive stance in their portfolios, Blayney concluded: “Cash and alternatives with inflation linkage such as commodities and ‘value exposures’ are preferred.”
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