The DPW Model Portfolios have continued their strong calendar year to date, posting further gains during the June quarter. These were spurred on by buoyant equity markets, solid returns from the āalternativesā funds within the portfolios and some relative outperformance within the direct stock allocation.
Inflation continues to remain the key consideration in the global economy, with central banks still focused on trying to bring it under control. This is the case both in Australia and the US. While itās true that inflation prints are starting to moderate, we still think the 2% CPI target in the US will be difficult for the Fed to achieve, primarily because of sticky government spending heading into the US election. Resilient wage growth also remains a factor.
The net effect of the above, combined with stubborn inflation domestically, is that rates are likely to remain higher for longer globally. We have the portfolios positioned accordingly.
Firstly, we are somewhat cautious on the outlook for government bonds, particularly in the US. While yields are indeed higher, we see some risk to capital values if rate cuts do not materialise in line with current market expectations, which we believe to be overly optimistic in the US. The outlook is more positive in Australia though, where the RBA has more room to cut relative to expectations, meaning potential upside to bonds in the event of an economic slowdown. Hence our current positioning in fixed income remains firmly tilted towards domestic exposure.
Secondly, we have tilted the portfolios more towards āalternativeā investments, that have differentiated sources of return outside of traditional equity and bond markets. These strategies are uncorrelated with equity and bond returns, providing greater diversification in the portfolios.
Finally, we see selective pockets of value in places such as Emerging Markets. The global economy is projected to grow at 3.2% in 2024 and 2025, matching 2023’s growth rate, with global inflation expected to decline as major central banks, including the Fed, loosen monetary policy. This trend is likely to reaccelerate global economic growth and support equity returns in Emerging Markets which are trading on much cheaper relative valuations vs developed market equities.
PORTFOLIO CHANGES ā QUARTERLY REBALANCE
Overall, we are happy with the current positioning, so changes this quarter are limited. We have made two small adjustments within the Australian Equities and International Equities asset classes:
Australian Equities: We have trimmed our position in Macquarie Group (MQG) -2.5% and added a small position in Origin Energy (ORG) +2.5%. We like Origin for its relatively attractive valuation, defensive qualities and key support post the fallout from the failed takeover bid in late 2023.
International Equites: We are rebalancing our allocation between the hedged and unhedged VanEck MSCI International Quality ETFs to bring the currency exposure to the long-term Strategic Asset Allocation weight of 70%.
Looking ahead, we remain overweight structural growth and quality stocks, taking profits where appropriate, and search for pockets of relative value, as highlighted by the exposure to Emerging Markets and Japan. We continue to watch the data closely, for any sign of rates slowing global economic growth.
Regards,
Greg Davis
Director
Greg Davis Authorised Representative 1245528 and Davis Private Wealth Pty Ltd Corporate Authorised Representative 1299449 are authorised representatives of Sentry Advice Pty Ltd (ABN 77 103 642 888, AFSL 227748.
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