Volatility persists...Three key positions to watch


In late January, we recommended trimming equity risk and adopted an overweight position in cash. The risks we flagged have intensified in February. Inflation has been persistent, leading the market to accelerate pricing for interest rate hikes, and Russia has invaded Ukraine. With strong, above-trend global growth still expected for 2022, a moderation of inflation into mid-year, and central banks expected to normalise rates gradually, this should be more supportive of risk assets as the world enters H2 2022. This month, we highlight three key positions to watch in 2022 across domestic equities, the Aussie dollar and tech stocks.

  • In the months ahead, the key questions driving markets are: Will the Russian invasion of Ukraine remain contained? Will inflation subside? Will central banks pause midway to judge the impact of hiking? Ultimately, the debate over where the inflation trend settles is less material this year. For markets, key will be whether inflation can embark on an easing path without central banks needing to slow growth.
  • Australia warrants a neutral to overweight regional allocation. Despite the weak start to the year, the current domestic equity reporting season has been relatively strong, as far as earnings are concerned. Looking ahead, the market’s current bottom-up earnings per share growth forecast for June 2022 is 11% and 2% for June 2023. Supporting the ongoing relatively strong earnings outlook is the underlying strength of the Australian economy, an above-trend global growth backdrop, as well as expectations that China will be recovering through H2 2022.
  • There are near-term downside risks for the Australian dollar, including a wave of global caution and risk-off sentiment. However, we also see a number of drivers that convincingly argue for a rising trend in the local currency – commodity prices are likely to be well supported, synchronised global growth normally leads to a lower US dollar, and the Reserve Bank of Australia is likely to begin lifting rates gradually. As the Australian dollar is expected to outperform the US dollar strongly over the coming year, for portfolios that adopt some hedging range for their global equities exposure, this would suggest leaning towards a higher share of hedging.
  • With regards to tech, we are cognisant of where valuations are today vis-à-vis the last time real interest rates were positive, so we are looking for a ‘valuation cushion’. We recommend owning high-quality, cash flow generative and largely profitable tech.