Stock market pressure requires allocation shift

A changing market environment amid high interest rates and inflationary pressures has toppled traditional asset allocation and required a shift to a more dynamic approach, according to Schroders Australia.

Simon Doyle, CEO and CIO of Schroders Australia, said the a dynamic approach that leverages its ability to move between different asset classes can help generate attractive returns, boost portfolio performance and provide downside protection.

“We think inflation will be generally higher and more difficult to keep close to 2 per cent. Share markets are likely to be more volatile than investors have been used to over the past few years as the world changes,” he said.

“Australia is looking better than the United States (US), which still looks quite challenged from a valuation perspective. There is potential for more downside in the US in the short term.

“We are positive structurally on commodities, which could be a source of upside return for Australia’s share market, which is one of our preferred share markets.”

Doyle said the combination of inflation, high interest rates and geopolitical tensions have forced labour, energy and capital costs up, proving active management and asset allocations more important than ever.

“We believe this will lead to greater cyclical and market volatility,  which has significant implications for investment markets and more importantly, the investment framework investors use to build portfolios,” Doyle said.

“In the current environment, asset breadth is good, backed up by active management, to allow investors to navigate a more challenging path forward – but also a rewarding one if investors get it right.”

Sebastian Mullins, Head of Multi-Asset in Australia at Schroders, said higher inflation and rates has flow-on effects for asset allocation.

“These conditions of higher inflation and interest rates will demand more active tactical asset allocation in portfolio construction. As the cost of capital rises, company earnings will be under greater pressure,” he said.

“The way investors implement a 60:40 portfolio is important – and that comes down to the risk tolerance of an investor and their adviser. From our perspective, it is about being more dynamic and knowing when to add more or less to a portfolio.

“There are some great opportunities in both the 60 and the 40 for active investors. If you are stuck in the 60:40 regime, what you put in the 40 per cent will depend on the economic environment.

“But the yield being offered on that 40 per cent is a lot higher than it has been in the past, and if you are a retiree, you want to access that yield. There are good opportunities to increase the yield aspect of your portfolio in this higher inflation environment.”