Positioning your portfolio in a changing environment

2012 was yet another uncertain year for the global economy with modest returns across all asset classes. The year ahead is showing some more hopeful signs from which investors can benefit if they follow the right strategy.

Positive signs in the global economy
The US has shown signs of a slow and steady recovery and while unemployment remains high, improvements in the housing sector and consumer spending are starting to have an impact.

While Europe remains weak, the good news is that the European Central Bank has been steady in seeking to find a solution that will contain banking issues to the region, allowing the rest of the world to resume its recovery.

Back in our region, there are better signs of economic activity and growth in China, which is good news for our resources sector. Other emerging markets in Asia and Latin America also have improved growth outlooks.

How these factors are impacting investment markets?
There is no doubt that the trend is away from cash toward growth investments as conditions improve. Attractive valuations in growth assets, stronger profit growth and continued low interest rates globally will fuel the demand for equities and drive market growth in 2013.

Domestically, the likelihood of further interest rate falls and some resurgence in Chinese demand will tend to push the Australian sharemarket forward, despite weaker growth and profit outlooks.

Cash investments continue to lose their attraction in the low interest rate environment both globally and at home, with the latter still having room for further cuts. Government bonds are suffering from low yields that are not expected to pick up unless there is a stumble in expected economic growth.

On the property front, unlisted commercial property and infrastructure should retain attractive yields, while property securities and housing prices will experience only modest growth.

How can your investments be best positioned to benefit?
In an environment that is in a state of flux and with opportunities in growth assets now emerging, the two key principles we want to emphasise are diversification and a focus on long term outcomes. It is simply too risky to be tempted by ‘short term fixes’ and attempts to ‘pick the market’ in such unsettled global conditions.

Diversification across various cash and growth markets is critical to limiting risk of sudden movements in any one sector. It can also position your portfolio for more stable returns and possibly better outcomes over the longer term.

While the flight to the safety of cash investments was understandable a couple of years ago, an overweight in cash now represents a significant long term, ‘opportunity risk’ that will generally be of more concern than any short term fluctuation risks in growth investments.

Retirees must also consider their ‘longevity risk’ – the possibility they might outlive the ability for retirement savings to generate income. An effective way to limit this risk can be to use growth investments that have the potential to protect capital.

By all means you should hold some of your portfolio in cash to fulfil your short-term needs, but diversity across various asset classes can be a durable long term solution.

In a volatile environment we offer the skill and experience to balance your personal risk profile with the need to build a diversified portfolio that can endure market fluctuations. We can also tailor a portfolio to balance your income needs with longer term capital preservation.

If you are concerned about how global uncertainty is affecting your investments, or would like to review how your portfolio is positioned, feel free to contact us to discuss your personal situation.

Download the latest Key Newsletter Summer 2013

Posted in Articles, Newsletters, The Key Newsletter.

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