Thanks for the your initial post introducing asset allocation to me in layman’s terms. I’m starting to get to grips with it. But now let’s get practical. How can I use ASX-traded funds to implement the allocation, once decided?
The much weaker than expected 38,000 gain in United States payrolls for May led many to fear a weakening in the US economy and immediately caused the market probability of a near-term Federal Reserve interest rate increase to drop notably. But rather than weak demand, the soft payrolls report might also reflect emerging capacity constraints. If so, it would pose upside risks to inflation and interest rates and downside risks to economic growth and profits.
It was a bumper month for the Australian exchange traded fund industry, which increased 6.3% ($1.4 billion) to hit a new record of $23.2 billion in total funds under management (FUM) in May. Growth this month was significant across all metrics, including net inflows, trading activity and new products launched.
There is an old saying within investment circles that goes – “Sell in May and go away”. Well, just so you know, sayings are not always right! If you had done that this year, you would have missed out on a rebound of ~3% on the S&P/ASX 200, and ~7% on the S&P 500 (on an unhedged basis). However, with the markets having rebounded in recent months without significant underlying earnings gains, the recent rises have been largely due to current valuations – Australian price to forward earnings are now at high levels (16X) relative to that of the past decade’s longer-run average (13.5X), and US markets are also at above-average valuations.
Risk markets strengthened further in May, helped by a rise in oil prices, signs of a Q2 rebound in US economic growth and apparent growing comfort with the idea the Fed may raise US interest rates in coming months.
The Australian equity market has enjoyed a few good months, though once again it is now facing valuations challenges. Irrespective of how the market deals with this challenge, however, one fact is indisputable: income returns from the market remain very attractive relative to interest rates. Given that local interest rates could fall even further in coming months, this suggests that the high yield equity theme is likely to perform relatively well in most likely market conditions. There’s even a chance that the equity market could be “re-rated” higher if interest rates remain below historic average levels.
BetaShares is proud to have been awarded the 2016 ETF Provider of the Year at the 29th Fund Manager of the Year awards hosted by Money Management and Lonsec on May 26th 2016.
Whilst every investor is different, there are 5 common themes we hear from many investors on an ongoing basis. They are the desire to:
- Increase the diversification of portfolios
- Get exposure to growth in a “low-growth” world
- Get exposure offshore
- Reduce exposure to the Banks and Materials Sectors in Australia
- Maintain a keen focus on valuations after a long (but challenging) “Bull Market”
The impending United Kingdom referendum on European Union membership remains a major “event risk” for global markets over the coming month. That said, polling suggests the chances of the UK leaving the Union after this vote are diminishing, which means there might be scope for at least a short-term “relief rally” for the British Pound. More broadly, however, it’s worth noting that UK equities have underperformed their continental counterparts in recent years, and lingering concerns over the UK’s commitment to the European Union suggests investors might consider European investments that exclude the United Kingdom.