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MEDIA RELEASE: The recent strong rally by equity markets at a time when monetary policy is driving a frantic search for yield will be a significant issue for investors in 2020, according to SG Hiscock & Company portfolio manager, Hamish Tadgell.

Mr Tadgell said it may seem contradictory that markets are rallying so strongly at a time when central bank actions are being driven by a sharp decline in global inflation expectations, and an increased emphasis on downside risks to growth.

“It would appear that for now, markets are in a ‘bad news is good news’ regime. Equity markets are taking comfort that global central banks will keep doing the right thing in providing loose financial conditions for investors.

“While central banks are cutting rates and economic growth remains below trend, this only reinforces the prevailing view.

“The key question for investors is, how long will this continue?” he said.

From a portfolio perspective, Mr Tadgell said while predicting the timing or trigger for a change in tide is difficult, there has recently been a discernible rotation in equities from more defensive to cyclical, and growth to value stocks.

“For the SGH20 portfolio, the rotation has certainly seen some value unlocked in a number of companies we hold which had dragged on performance over the previous 12 months,” he said.

The shift appears to have been driven by signs of potential for an improvement in global growth following more constructive trade discussions and greater focus on valuations and earnings (or specifically, lack of earnings) around recent high-flying growth stocks. 

“There seems to be potential for this to extend if there are further signs of improvement in global growth, coupled with just how crowded the yield-long duration trade has been. However, it is also important to keep in mind this has been a very unconventional cycle which is mature. From a portfolio perspective the challenge remains balancing the growth prospects of individual companies against low rates and valuation risks.” said Mr Tadgell.

Echoing Mr Tadgell’s comments on yield, SG Hiscock’s director and portfolio manager of AREITs, Grant Berry, said the sector is expected to be well supported by investors on the basis that bond yields remain at current levels.

“The 2019 calendar year has seen the AREIT sector perform strongly, and we anticipate this to extend into 2020. 

“However, we recognise there are increasing risks emerging within the sector as well as associated pricing and, as a result, we have taken a more conservative approach to valuations pushing up capitalisation rates,” he said. 

Mr Berry said the recent shift towards value, with some reduction in risk behavior, has seen this approach start to outperform while continuing to deliver good absolute returns.

“Given we’re at a late stage of the cycle, particularly for commercial office and industrial property sectors, we would prefer to have exposure to high quality assets, AREITs with less cyclical factors, and investments trading at discounts that are out of favour,” he said. 

Mr Berry drew a parallel between property and the broader investment spectrum, namely equities, arguing there has been a significant divergence between growth and value companies. 

“What we have been experiencing in the property sector sits within this broader context. Late cycle means higher pricing and a more elevated risk appetite. The reality of investing in an environment of near zero interest rates, both locally and globally, is without precedent with heightened risk behaviour. For this reason, we have positioned our portfolios defensively and with a strong emphasis on value to deliver for the longer term,” he said.