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The asset classes to avoid as markets bubble away

Originally published on

Livewire Marketson 8 September, 2021
  10 min read

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In a time when markets continue to reach new highs, while bond markets continue to cascade lower, MLC Asset Management's Anthony Golowenko is adamant that "something's got to give".

According to Knight Frank, house prices around the globe have risen at their fastest rate since 2006. Nearly all the world's indices are well and truly in the green both over the past year and in 2021 so far. The S&P 500 and NASDAQ indices, in particular, recently hit their 53rd all-time high this year (according to Business Insider).

And yet, inflationary fears are at 30-year highs and US 10 year treasury yields are sitting at around 1.3%... Golowenko may have a point.

In this video and wire, he outlines why MLC Asset Management currently believes that we could be nearing the end of the bull market, as well as the asset classes they are currently limiting exposure to with this in mind.


You can watch the video below or read an edited transcript. This interview took place on 24th August 2021.


  • Anthony Golowenko: Looking at Financial Year 2021, we've had some cracking results out of equity markets. Many people reviewing their super balances may have got a very pleasant surprise as to the degree of returns. But stepping back from that on a two to three-year view, what we've really done is just re-establish these intermediate trends. 

    Going back post-global financial crisis, we saw accommodative traditional measures implemented by central banks and cash rates being cut to what were then very low levels. Subsequently, they've gone to effectively zero, in some cases below zero, and that's amplified by unconventional measures through the yield curve. 

    In this environment where we've got equities at or near record highs, bond investors and bond yields at or near record lows, central banks continuing with their conventional and unconventional stimulus. And all the while we've got fiscal taps turned firmly on. These forces point directly at the inflationary outlook. But from my perspective, and thinking of that environment, look, something's got to give. 

    And whether that's a gradual adjustment in bond yields and we're starting to see that, whether that's central banks and a program of very sequential de-leveraging. It's going to be a very closely managed approach. 

    Ultimately, inflation expectations are moving. We know the base effects are cycling off beyond the near term. Supply chains are going to take beyond the near term, but we see that also as being resolved. This key issue is around the consumer and the consumer demand coming through both 'on-the-couch' goods demand and 'off-the-couch' services. And it's the two of those together with a view of moving towards full employment, where we get to that desired end state of ultimately real wages growth, resilience in the economy, and a gradual unwind of these really accommodative unconventional policy measures.

    So something's got to give. We believe it does have to give. The path is a very careful one to be undertaken with central banks and fiscal policy. But ultimately how MLC Asset Management thinks about positioning our portfolios is elements that are deliberate and are going to play offence, so more a participate in continued market strength. And looking at other pieces that are going to be more resilient and more diversified, whether that's derivatives or options on the downside, whether it's a foundation of income through things like real estate or global listed infrastructure, or whether that's short-dated maturities. We've got a participate and protect mantra.

    Where we are we're certainly not at the start of a new bull market. We're more towards the end of something that's going to be an elongated investment period. We certainly want to deploy capital very judiciously in this environment.

    What asset classes have limited upside ahead of them with all that in mind? 

    Central banks really have just gone out of the gates to stimulate markets and continue to stimulate with both conventional and more importantly, unconventional policy. What that has done is crush cash rates. It's then expanded through the yield curve and we still see negative-yielding investments across a large proportion of government bonds. 

    So for our investors, we think about a medium-term horizon in achieving that. Nominal bonds are the obvious area that we want to be deliberate in our exposure. Longer duration exposures we've brought forward and narrowed down. So that's an area that we don't see the risk-reward delivering the payoff that we're looking for.

    Traditionally fixed interest has played two key roles in portfolios. And the first of those is providing a foundation of regular income. And the second is providing diversification in periods of uncertainty and volatility. 

    With yields being as low and as anaemic as they are now in traditional nominal bonds, we're not getting that foundation of regular income and we've also got a significant amount of capital at risk. In response, we have shortened up some of that duration, we've utilised more credit exposure in longer maturities and we've also brought in inflation-linked exposures.

    I have previously mentioned listed real estate and the significant opportunities we see in cash flows. However, one area where we're more limited in our exposure is in traditional big-box discretionary retailing. We think there is potential that through vaccines we are moving to a recovery and reopening of global economies. The challenge, and through the period even before the pandemic, we've seen this business model potentially challenged. Risks are elevated and we view that our capital can be more efficiently deployed in other areas of real estate and infrastructure.

    There's certainly a challenge with equities. Going into reporting season, there are fairly high levels of optimism and that's sort of playing out in 1) the results, and 2) the outlook statements, which not surprisingly, we're not getting a lot of, or there is quite a reasonable amount of conservatism in outlook statements. And given valuations are as elevated as they are, there's a potential for a fairly amplified or fairly large drawdown, should those expectations not be met.

    So within the managers that we utilise, we certainly want to focus on quality. We're prepared to pay up for that quality as it manifests and takes time to play out. We'll tend to focus not on necessarily inexpensive companies, but companies like high-quality industrials that can grow into their valuation as opposed to maybe some of the more speculative and technology-related smaller names. So businesses, maybe in the mid-cap space, such as Reliance Worldwide (ASX: RWC) or James Hardie (ASX: JHX). Traditionally, they are a bit more expensive. But we believe they have the opportunity to grow into their valuations. But yes, we're not really stretching it in terms of our portfolio positioning.

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