Investors and financial planners in the current market need to look beyond the standard asset allocation choices of chasing share market beta through passive equity funds and relying on bonds for diversification, according to Evergreen.
Evergreen Consultants founder, Angela Ashton, said it was time for investors to explore alternatives, including gold, commodities, private credit, unconstrained total return multi-sector funds and real asset funds with holdings such as infrastructure and real estate.
“What we are seeing is a mix of strong, sustained inflation coming through and interest rates rising, with last month’s Fed rate rise the first since 2018,” said Ashton.
“We have reached an inflection point in the cash and bond markets.”
In Evergreen’s view, the corporate earnings cycle had peaked, and equity markets would become more volatile, with the war in Ukraine adding to inflationary pressure, labour costs rising and profit margins under pressure.
Evergreen was forecasting 7.75% average annual growth for Australian equities over the long term, with annualised volatility of 13.5%. This was based on a view that Australia’s long-term equity risk premium (ERP) of 4.5 % would remain unchanged.
Bonds moved extraordinarily in March, with yields moving sharply in both directions, an overall deteriorating trend and the appearance of an inverse US Treasury yield curve, with yields on two-year Treasuries higher than 10-year Treasuries at the end of the month.
“Investing in bonds will be very difficult this year as we expect a lot of volatility. It would not be surprising to see yields rise further from here and it is very hard to know where they will land. Markets are volatile and there is every chance they will overshoot,” said Ashton.
Evergreen’s Long Term Expected Returns Framework highlighted the strong risk-adjusted returns on offer from Australian and global credit.
The outlook for Australian credit was for average return of 3.95% a year, with annualised volatility of 3%, while global credit was expected to return 3.75% a year, with annualised volatility of 3%.
Ashton said credit has the advantage over bonds of having yields set at floating rates, which would rise as interest rates rose. She cautions that there is a greater likelihood that some credit funds will suffer defaults in the volatile trading conditions ahead and many funds are illiquid.
Evergreen also said gold was reconfirming its role as a safe haven holding, rising out of the range-bound position it was stuck in for much of 2021, in response to the Russian invasion of Ukraine and other global tensions. At its current level around A$2,500 an ounce, it was close to a two-year high.
“The old investment rules are not going to work going forward,” said Ashton.
