The farrelly's Dynamic Asset Allocation Handbook features editorial exploring investment strategy "hot topics", farrelly's long-term forecasts for asset classes, a detailed review of the long-term forecasts for an individual asset class (rotating across asset classes each quarter) and three asset allocation models to assist with implementation...

Welcome to the farrelly's Dynamic Asset Allocation New Zealand subscriber only area...

Welcome to the farrelly's Dynamic Asset Allocation Australian subscriber only area...

The farrelly's Dynamic Asset Allocation Handbook features editorial exploring investment strategy "hot topics", farrelly's long-term forecasts for asset classes, a detailed review of the long-term forecasts for an individual asset class (rotating across asset classes each quarter) and three asset allocation models to assist with implementation...

There was plenty of food for thought and grist for the investment portfolio mill, coming out of the recent Markets Summit 2023 "Every VUCA cloud has a silver lining!".

As the clouds of Volatility, Uncertainty, Complexity and Ambiguity continue to swirl, the silver lining is that we are on the road back to normal monetary policy settings, from abnormal, and a return to more rational asset prices. But we must be patient.

Jonathan Pain | 0.50 CE

Disinflation has begun in the United States and will soon in Europe, but cutting inflation from 4% to 2% will be tougher than from 6% to 4%. Even after the near-term battle has been won, the probability of structurally higher inflation across developed economies has increased, and monetary policy responses are likely to diverge meaningfully. To navigate this transition’s VUCA, investors will need to leverage the experience of past decades while also humbly contemplating an uncertain outlook. The winning investment playbook will no longer depend solely on macro factors and asset allocation but will also require fundamentally driven security selection to drive returns. Compared to any post-WWII period, this time really is different!

The pre-pandemic New Normal decade of subpar-but-stable economic growth, below-target inflation, subdued volatility, and juicy asset returns has faded in the rear view mirror. That environment introduced investors to TINA - there is no alternative. They were forced out the risk spectrum from government bonds, to corporate credit, to equities and beyond, while bonds’ diversifying characteristics came into question But after facing difficulties on all fronts in 2022, investors should be rewarded with more opportunities ahead, even as the global economy confronts headwinds. With interest rates and bond yields having moved higher, every VUCA cloud has a silver lining! It’s time to say goodbye to TINA because bonds are back.

Private debt will keep your portfolio on an even keel in turbulent times by adding the necessary ballast to provide the capital security that other assets cannot deliver. When peaceful trade and stable inflation are the norm, investors can use long duration debt and equity to provide adequate return without fearing their portfolios will capsize. Today, investors face the opposite scenario in which the Ukraine war, amongst other factors, is driving economic turbulence and high inflation. In these unsettled VUCA conditions, private debt can offer short duration with a focus on capital preservation. Its characteristics – including floating rates, strong governance, and low correlation with public markets – all work to ensure smooth sailing and a silver lining for investors in the form of consistent, risk-adjusted returns and income

Higher bond yields don’t automatically translate to higher returns because yield is not free money, it is compensation for risk. Therefore, those constructing portfolios must understand the nuances of bond risk/return drivers and how bond market performance can be impacted by different macro scenarios. Forecasting the macro outlook is difficult at the best of times and perhaps near impossible in the current high VUCA environment. The silver lining is that fixed income offers lesser-known return sources that are independent of the macro outlook, which means opportunities abound for those willing to look beyond the conventional, dig into some of the complexity, and reorientate their portfolios accordingly.

The RBA’s hawkish pivot signals a turning point for Australian equities. Backed into a corner with a high inflation, the RBA is set to continue rate hikes that will bring on an earnings recession in 2023. Although the ASX failed to make new highs in 2023, the market is at a high that makes it vulnerable to more downside. While mortgage rates are rising and the retail pain is only just beginning, Australian CPI – which had been lagging the rest of the world – is still rising while inflation in other economies is moderating. Practitioners should be patient and use equity market weakness later in this year as the silver lining to position for an improved long-term outlook for Australian equities.

This panel session features three investment experts, each offering and debating a high conviction thesis on a long-term, deep rooted structural change impacting markets over a decade or more...

Investing in global REITs enables investors to gain exposure to real estate in a liquid form. Liquidity plays a key role in portfolios and investors value this more in times of market stress. This was once again highlighted over the course of 2022 during the rapid change in inflation and monetary policy settings. Given the recent market volatility impacting the listed markets, we are now witnessing dislocation between public and private market real estate valuations. Although the consequential volatility casts a VUCA cloud over REIT performance, the silver lining is that this is transitory, in part reflecting a number of the sector’s key attributes including transparency and liquidity. Over the medium to long term, the performance of select well managed REITs is driven by the performance of underlying real estate, and dispersion between public and private market real estate values converge.

With macro uncertainty from slower growth prospects, elevated inflation, and still hawkish central banks, investors need to look beyond such VUCA noise and the immediately available information, to align investments with global megatrends. They are changing the investment landscape and shifting the direction of investment capital. It’s vital to keep a long-term orientation in investment philosophy, with a focus on quality growth companies that are well positioned to benefit from secular themes of changing demographics, tapping into the growing need of healthcare, leisure, financial planning, beauty, tourism for aging, and living-longer societies. Innovation is the silver lining, fuelling the next stage of corporate growth through increased automation driving productivity efficiency, leveraging on the reshoring trends and digitalisation, and connecting consumers to benefit from the rise of the middle-class’ purchasing power, particularly in emerging markets. Sustainability is at the core of future societies. By channelling investments in companies with sustainable practices, heightened by environmental and social conscience, investors can seize opportunities in transitioning economies.

After a chaotic period for economies, healthcare and markets, across most asset classes, silver linings are emerging. In Europe, the shuttering of Russian energy supplies is motivating governments and companies to accelerate the transition to alternative energy sources. Combined with policy initiatives and a significant injection of capital, energy systems are moving towards a new sustainable paradigm. Meanwhile, investments in data and computing speed are taking artificial intelligence to a remarkable level, opening significant productivity opportunities. Global equity investors can capture these silver linings by identifying the companies best placed to benefit from shifts in energy and technology.

While macroeconomic factors are an important driver for asset allocators, once the decision has been made to invest in global small caps, fundamentals return to the fore. Cash flow generation, quality balance sheets and valuations are long-term drivers of outperformance in this asset sub-class. Macroeconomic VUCA concerns become an opportunity creator in the vast small caps sector. The limited research coverage and the inefficiencies in this market are the opportunity that creates a strong hand for prepared fundamental investors.

The US has dominated global equity returns for approximately 15 years. This is a cycle – it is all cycles! And that cycle is over. It turns out that Francis Fukuyama’s “End of History” wasn’t quite accurate. We live in a multipolar world. Amid complexity and ambiguity, investors will have to work harder to make money than just owning US beta. The silver lining is that there are large equity markets and sectors including China and Japan that are cheap, with significant growth drivers.

After a lost decade, cyclical and structural headwinds are abating for emerging market equities, while profound secular changes are becoming tailwinds. But the path ahead will look very different to the past, as emerging markets undergo rapid social and structural transformation, accelerated by the Covid-19 pandemic. In times of complexity and ambiguity, investors should avoid the risk of betting on yesterday’s winners. The real opportunity lies in taking a fresh approach to identifying, understanding and investing in upcoming trends that will shape emerging markets, some of which will even influence the developed world.

As practiced, there are significant challenges to sustainable investing. These include multiple definitions and confused terms, overreliance on checklists, misleading marketing campaigns, and a lack of rigour and accountability. Yet these criticisms are by no means evidence that sustainable investing and environment, social and governance (ESG) are failed concepts. ESG analysis advances and drives sustainable investing by helping investment practitioners develop a clearer view of a company’s true market value, consistent with their fiduciary duty. In a world that needs transformational change, ESG is crucial to building a financial system in which capital allocators integrate climate and justice in their decisions, across all asset classes. For practitioners who proactively and consciously embrace this responsibility, such capitalism will deliver the unmistakable silver lining of a performance advantage.

Our diverse panel of experts debated which of the high conviction propositions they heard during Markets Summit 2023 they most strongly agreed with and why, including identifying "silver linings" (investment opportunities not yet fully priced into the market) and which they disagreed with most and why - and the portfolio construction implications of both.