Since our recent updates on the outlook for equities, we have continued to see broad weakness across equity markets.
There have been several factors contributing to this, notably concerns that a conflict between Israel and Hamas could spill over into a broader conflict, a rise in longer-dated bond yields, and some underlying concerns in S&P500 Q3 earnings results despite headline numbers coming in ahead of expectations.
Since peaking in July, the S&P500 has now declined a little over 10%, reaching the definition of what is commonly referred to as a “correction” with the ASX200 on the verge of meeting the 10% threshold. As seasoned investors are aware, while equity markets have historically provided some of the highest returns among asset classes, markets spend most of their time ranging from 0-20% below highs, rather than a constant march upwards. As the saying goes, ‘Nothing changes sentiment like price”, and what seems like a constant flow of negative headlines has added to this recently. While always mindful that the outlook can deteriorate, there are several reasons for optimism, notably resilient labour markets, and economic growth, which should translate into positive corporate earnings, with expectations of earnings over the next 12 months continuing to rise.
Overall, despite the potential for short-term volatility that is part of equity investing, our broader outlook remains unchanged. We view resilient growth and labour markets as supporting the outlook for corporate earnings, offsetting the headwind that is higher interest rates and a slower return to target inflation than hoped.
Within equities, performance will likely continue to be mixed, with growth stocks facing the headwind of higher interest rates for longer. Our preference within equities remains large capitalisation stocks, such as those within the ASX Blue Chip portfolio, benefiting from lower valuations, strong cash flows, and dividend yields, which historically perform better during rising interest rates.
For those focused on fixed income, a particular area we believe will continue to perform well in this environment is floating rate fixed income. Hybrid securities, like those that sit within the ASX Income portfolio which has returned 4.94% year-to-date, benefit from higher levels of interest rates, increasing their yield (currently 7.75% on a gross basis) while their capital value tends to be less volatile.
Our general advice is to have a diversified approach, having exposure to a variety of asset classes such as the Low Volatility portfolio within the Apex Separately Managed Accounts. This portfolio has returned 7.56% over the past 12 months compared to a 3.9% gain for the ASX200. Those who are interested in finding out more information can do so here.