While goods inflation has eased, “sticky” services inflation – bolstered by robust wages growth – has led financial markets to wind back their expectations of a rate cut in the coming months.
However, Zenith Investment Partners’ head of asset allocation, Damien Hennessy, is confident that a softening labour market should eventually lead to a decrease in wages growth.
“Our expectation is that inflation will stay relatively high over the short term, but we could see a return to some disinflation over the second half of the year,” Hennessy said in a market outlook this week.
Getting to disinflation, however, is likely to be a “bumpy” process, he elaborated.
“The outlook for interest rates and economic growth is uncertain and portfolio allocations have to allow for that.”
While Hennessy believes the Reserve Bank of Australia will cut rates in the latter part of 2024, possibly in November, he said Zenith’s strategy includes “not betting heavily on one particular outcome”, but instead, positioning portfolios to cope with a range of different economic scenarios.
“From a portfolio perspective, we’re targeting areas like adding to duration for bond allocations over the past 12 months. We want to be in a position where we have more bond duration to cope with possible economic scenarios. We also like credit and are slightly overweight high-grade credit, or corporate bonds,” he said.
“In equity markets, we’re targeting the parts of the market that are getting reward for the risk that you are taking, and that includes global smaller caps and some parts of emerging markets. We do still like quality as a factor within equity portfolios.”
Ultimately, Hennessy said Zenith’s outlook for interest rates and economic growth remains precarious, and portfolio allocations have to allow for such uncertainty, but a soft landing remains Zenith’s base case.
“That is how we’ve been building investment portfolios,” he clarified.
Moreover, he highlighted that the environment is ideal for active management, adding: “The benefit of active managers is that they’re spending their research time and resources on the ground, meeting with companies and researching different assets to gain more in-depth information about investment opportunities”.
“As investors, we benefit from those deep insights and connection with the market,” he said.
Speaking at the Australian Wealth Management Summit last month, Cassandra Crowe, vice-president at T. Rowe Price, similarly explained that following a period of narrow markets and limited market leadership, the fog is dissipating, bringing to the fore the power of active management.
Crowe underlined the significance of exercising “thoughtful and responsible” judgement in opportunity selection, alongside the necessity for active management.
“Investing on the right side of change, it has never been more important to actively manage your portfolio to embrace opportunities and manage the risks that are ahead.”
