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Building a ‘no-fear’ portfolio in the era of headlines and click bait


Fear is a great selling tool; it may in fact be the best. This is a commonly accepted fact when it comes to media, particularly in relation to financial matters. Headlines that highlight the “$50 billion dollars lost” when the share market falls tend to forget to mention that the market is valued at more than $1 trillion. Either way, they still get the most eyeballs.

  • In an environment where both bond and equity markets are trading at or around all-time highs, human nature forces some level of pessimism out of even the most objective of us. In recent weeks and months this has centred around the looming threat of inflation, sky-high valuation of tech stocks and geopolitical risk involving China. We only need to look back 12 months ago to remember the calls for an economic catastrophe, property market collapse and the end of capitalism.

    The headlines were clearly wrong then, so what if they are wrong again now? As a financial adviser, a healthy dose of pessimism is required on a daily basis, along with the ability to play devil’s advocate every now and again. Discussed below are my five changes for a “no fear” portfolio.

    1970’s inflation is coming

    The list of experts suggesting an uncontrollable inflation outbreak is just around the corner continues to grow. A decade of money-printing, fiscal stimulus and now a pandemic are expected to result in an unexpected increase in interest rates, hurting both bonds and equities.

    Or could we be heading into a deflationary decade like Japan? Little has changed when it comes to deflationary forces like our ageing demographic, technological advancements, and indebtedness, in fact they have accelerated. In the event of deflation or sustained lower inflation, I’d be buying-up long-duration government bonds. 

    ‘Value’ stocks better positioned than growth

    ‘Value’ stocks have been all the rage in 2021, with the most staid value managers delivering incredible short-term performances. They suggest buying into cyclical companies exposed to earnings upgrades will benefit from a sustained economic recovery. Yet both monetary and fiscal stimulus is being continued around the world suggesting policymakers don’t share this confidence. At the same time, lockdowns and continued outbreaks around the world mean that the recovery will be far from smooth. 

    In the last six months high-quality, more defensive companies like healthcare and consumer staples have been sold-off. Investors flooded into cyclicals, ranging from retail to commodities and financials with the momentum sending many to all-time highs. With the prospect of a more divergent economic recovery increasing, the out-of-favour global leaders like CSL will likely do well.

    Big tech is overvalued

    Staying with this ‘value’ rotation, which has outperformed ‘growth’ stocks for the first time in several decades, we have ‘big tech’. Microsoft, Apple, Google, Amazon, Facebook, Netflix and the list goes on. The consensus appears to be that inflation and subsequent interest rate hikes simply do not support the valuation of these companies.

    A closer look suggests the current and future valuation of many of these companies is more than warranted. The quarterly results from the likes of Microsoft and Apple have been stunning, to say the least. Investors looking for the no-fear portfolio need to accept that companies able to grow above 20 per cent per quarter justify the most significant of valuations. After underperforming since November, the Nasdaq is showing signs of recovery, making it an opportune time to make a ‘contrarian’ allocation to big tech. 

    Another commodity super-cycle

    Commodities have once again been the saviour of the Australian economy, with a shortage in supply combining with an infrastructure boom sending both copper and iron ore to records. Many are now predicting that this new commodity super-cycle will result in a sustained improvement in the AUD, with little risk in Australia’s weakening trade relationship with China. Similarly, many now suggest the US economy is heading into a period of underperformance and weakness, with the debasement of the USD to follow.

    I’m not so confident. The entrepreneurial nature of the US population has been proven time and again. The resilience of the most powerful economy in the world should not be ignored. With fiscal and monetary policy combining, a common foe in the form of China, and a reinvigorated manufacturing base, the contrarian view would be that the US economy is set for a renaissance. On this basis, I’d be moving to unhedged positions and buying USD exposures.

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