Strategic Tilting - May 2021
By Martyn Wild.
Strategic Tilting Summary
Strategic Tilts are based upon our estimate of the probability that an asset's return over the next 12 months will be higher or lower than the last 12 months. Where that probability exceeds a defined threshold, a Strategic Tilt to over/underweight that asset is suggested.
Eye of the Storm?
It's a matter of record that many listed equity markets have been on a roll for some time now; just look at the US stock market! As such and given that equities tend to form the core risk exposure of balanced portfolios, the question one might ask is, "when it will come to an end?"
We think that might be soon.
As an example, we estimate that the broad Australian equity market has less than a 10% chance of exceeding its return in the past 12 months. In the 12 months to May 2021, it returned approximately 29%! The long-term average is more like 7%.
Now, strong returns don't necessarily imply that returns will be negative going forward...but we do infer from them that equities are currently expensive. We take 'expensive' to mean that reversion to a more modest annual return is becoming increasingly likely. Moreover, our conclusion has been the same since the end of March 2021. Similarly, fixed income looks relatively cheap.
Now, even the most gloomy near-term view of equity markets doesn't negate their relevance in a long-term, strategic asset allocation: any good portfolio is built to withstand the inevitable gyrations of financial markets. So, if you've put together a solid plan, stick to it.
That being said, it might be prudent to trim those overweight equity positions or dollar-cost-average into new ones to avoid buying in close to a high.
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MARQAM is a privately-owned, boutique consulting company focused on providing superior investment outcomes for clients and greater profitability for businesses. We are not affiliated with any other financial institution
Disclaimer: The information provided here is for interest purposes only and does not constitute investment advice or a recommendation of any kind.