The market has drifted sideways, which may indicate a level of desensitisation towards geopolitical issues, particularly the issue of war and suffering. Cautious investing is appropriate in this instance, as it is in most circumstances.

Economic indicators suggest inflationary pressures remain, regardless of central banks increasing interest rates. In the US, retail sales have increased more than expected, purchases of motor vehicles are up as is spending on restaurants and bars. Year to date, crude oil is up 13%, placing additional upward pressure on inflation. This has resulted in bond yields increasing, as the market anticipates rising inflation and interest rates.

US 10 Year Bond Chart

The Australian market tends to follow the US.

Aust 10-Year Bond Yield

A robust economy is generally supportive of equities. Additionally, equities tend to be a reasonable hedge against inflation, especially those businesses that have pricing power and can pass cost increases onto customers while maintaining profit margins. A good indicator of that is high levels of Return on Equity (ROE). Balance sheet strength is also important, as the cost of capital has risen. Companies with high debt levels have seen margins fall as the cost of servicing the debt draws away from profitability.

Riskier ‘growth’ stocks have generally underperformed ‘defensive’ companies as investors are not required to increase risk as much to achieve returns. Again, we advocate for defensive portfolio positioning, especially given this geopolitical and economic backdrop.

Alex Leyland

Scroll to Top
Scroll to Top