ARTICLES

In early December, the Reserve Bank of Australia (RBA) made a 0.25% bump to the cash rate, taking it up to 3.1%. Although they quickly pointed out that monetary policy wouldn't be on an autopilot system in the future, they also suggested further increases in interest rates over time based on the labour market and inflation developments as data becomes available.

As the likelihood of a 0.50% rise in the US cash rate loomed, Australian yields declined initially. Still, when the decision was confirmed and accompanied by a hawkish statement from the Federal Reserve, this caused a reversal in yield trajectories. Subsequently, just before Christmas, these trends accelerated as an unexpected change to the Bank of Japan's Yield Curve Control occurred.

At the start of the month, the AU3Y government bond yield dipped to 3.02%, ending 34 basis points higher at 3.50%. At the longer end, the AU10Y and AU30Y yields took a tumble down to 3.31% and 3.58%, respectively, before climbing back to close the month at 4.06% and 4.35%.

According to recent Australian economic data, the 0.6% GDP reading over the September quarter indicates that activity-based measures are still strong but have begun to moderate before year's end. The NAB Business Survey in November showed a decrease in business conditions yet remained above average despite declining forward orders and confidence.

The jobs market in Australia is as strong as ever, with employment rising by 64,000 in November, exceeding expectations. The participation rate of 66.8% has returned to its historical high, and the unemployment rate remains stable at 3.4%. Despite these positive indicators, consumer sentiment continues to suffer due to increasing living costs and tightening monetary policies.

Volatility crept back into the short-term bank bill yields as markets reevaluated their expectations for monetary policy. As a result, rates across three and six-month bank bills traded higher by 17.5bps and 20.5bps, respectively, concluding the month with 3.27% and 3.78%. Markets anticipate that interest rates will reach an apex of 4% close to late 2023 during this tightening cycle.

December 2022 Summary

• Global stock markets posted the worst performance since 2008
• The US Fed has raised rates by 4.25% compared to the 0.75% expectation at the start of 2022
• The Value sector outperformed Growth by the second-biggest margin since 1979
• Inflation and employment levels remain elevated
• PMIs and housing data are in a sharp decline

As 2022 drew to close, global markets were trying to recover from the pandemic while juggling an array of economic and geopolitical obstacles. Inflation skyrocketed due to extreme fiscal and monetary policies, supply chain problems, changing consumer habits towards goods consumption instead of services', high employment numbers along with wage increases, Russia's war against Ukraine and China's zero-covid rulebook.

Faced with persistent inflationary pressures, a host of global central banks undertook one of the most aggressive tightening cycles in recent history. 2022 saw 80 central banks around the globe increase interest rates - 15 out of these being amongst the top 20 most influential for worldwide markets. The Federal Reserve's interest rate soared by 425bps over its last 7 meetings; equating to seventeen 25bp hikes when earlier in 2022 investors had only expected three such increases.

Equity benchmarks in the US (INDU, SPX, NDX, RTY & MID) experienced their poorest annual performance since 2008 with consecutive losses registered over all quarters of the year. The Dow was a noteworthy exception to this pattern because it is uniquely weighted by price and has more value-style members than other indexes. The Nasdaq Composite and Nasdaq 100 underperformed, largely due to their heavily weighted mega-cap growth stocks that were severely affected by the sudden spike in rates.

After an incredible year of double-digit gains in 2021, only two out of the eleven industry sectors finished above par. Energy blazed past with a return of 65.4%, following its leading 54.4% gain from last year; Utilities, Staples and Healthcare posted near flat returns while Communications, Consumer Discretionary and Technology lagged.  

The Months Ahead

Despite the unpredictability of 2022, when central banks tightened monetary policies much faster than anticipated, this year likely proves to be just as difficult for strategists and analysts attempting to forecast economic activity, corporate earnings, and asset prices. 2023 could easily follow suit.

The prediction from both markets and the Fed that the peak terminal rate this cycle is about 25bps away, futures are currently indicating a potential decrease in interest rates by late US summer. Conversely, dot plots from the FOMC imply an increase of these same levels all through 2023. The Fed's estimation of 0.5% GDP growth forecast for 2023 is as close to hinting at an upcoming recession as they get.

As China confronts the onslaught of Covid cases in 2023, it has become a huge uncertainty for many. Predicting what lies ahead for the USD is a problem, leading to conflicting global forex trends across markets. Yet if we consider the "peak inflation" or "peak tightening" and further bearish signals on the US recession ahead, emerging markets deserve greater attention as they begin to look increasingly attractive or at least worth considering in the month's ahead.

As predicted by many, the Reserve Bank of Australia lifted the cash rate in early November by 0.25%, raising it to 2.85%. The RBA made it clear that although monetary policy was not set on a particular path and further tightening was probable in the near future. Yields rose in unison early in the month after messaging from central banks, particularly the US Federal Reserve, gave assurances that rates would continue to rise. However, following cooler-than-expected inflation readings, markets began to doubt how much or how quickly rates would continue to rise, and yields drifted lower as a result.

Our portfolios were all very positive for the month and have demonstrated better capital preservation in recent months than many, as we are emphasising genuine diversification at a portfolio level and keeping our positioning conservative in what we still believe to be a bear market with further downside risk into 2023.

We continue to believe that over the medium-term, inflation pressures will remain volatile, while real economic growth will remain weak given a relative paucity of productive investment and large debt loads for many economies.  We are still very concerned by geopolitical risks and the massive challenges to the previous period of globalisation and peaceful prosperity.  We aim to remain astute, flexible and highly risk-aware in an ever-changing and potentially highly challenging investment climate.

2023 sees the risk of an economic and earnings recession and its attendant impact on markets as persistent central bank tightening and structural challenges impact markets with a lag.

Given our outlook, we see the need for precious metals and selective commodities such as energy and resources allocations in portfolios and a more diversified approach than what is commonly relied upon by our industry.  We will look at judiciously increasing equity and credit exposures sometime in 2023 when we assess a more favourable valuation and outlook.  Currently, capital preservation and prudent diversification is more important.

Our Cash Plus portfolio is defensively positioned, while our Short Term portfolio is relatively defensive, with both designed to be less volatile over shorter-term time periods than our longer duration portfolios – while being designed for shorter-term liquidity needs.    

Our more medium and longer-term orientated portfolios target returns and manage risk with longer-term time periods in mind.  The Wealth Builder’s larger risk tolerance gives us the most leeway to back higher-risk assets based on our insights and research while still managing risk prudently over a longer-term time frame through dynamic asset allocation.  In our longer-dated portfolios, we are relatively conservatively positioned for now, which gives us significant scope to increase equity positioning in coming months as opportunities present themselves.

Dynamic Asset’s portfolios are designed to be diversified but focus only on investing where return prospects are assessed as capable of meeting the return objectives of the funds over their respective time horizons.  This diversification provides useful mitigation against risk over the appropriate time period consistent with each portfolio’s objective, while our active assessment of risk and return can target capital to where it appears most prospectively and appropriately placed.  In this way, we believe we are much more forward-looking than most diversified managers who tend to be much more focused on what has happened and what industry peers are doing, which is to typically build portfolio asset allocations by relying more upon past returns, correlations and volatility - which we believe are under threat as conditions are markedly different today from the past 10-20-30 years.  

We are better diversified than most typical portfolios by holding meaningful weightings to alternatives and ‘hard assets’ in different guises and expect these to provide valuable return and risk contributions over time, even if they are occasionally volatile individually.  We believe large and unsustainable debt burdens, demographics, poor government policies and market interference continue to strangle long-term real productivity growth for much of the world economy.  This potentially bodes relatively poorly for traditional risk assets and index investing, upon which most traditional investment strategies and super funds are heavily dependent.  

We are very concerned by geopolitical risks and the massive challenges to the previous period of globalisation and peaceful prosperity.  The increasing risk of major conflicts gives further credence to our concerns.  We think investors are best served by researching thoroughly and thinking more broadly and outside the box in order to better protect and grow their capital, including potentially greater use of selectively chosen value-adding liquid alternatives, along with precious metals exposures and greater weightings to real asset proxies.  

We aim to remain astute, flexible and highly risk-aware in an ever-changing and potentially highly challenging investment climate, and will continue to look to take advantage of the volatility, uncertainty and fear to add value to the portfolios through time.

Our portfolios were mostly positive for the month and have demonstrated better capital preservation in recent months than many, as we emphasise genuine diversification at a portfolio level in an uncertain world rather than one-way bets.

We continue to believe that over the medium-term inflation pressures will remain volatile, while real economic growth will remain weak given a relative paucity of productive investment and large debt loads for many economies. We are still very concerned by geopolitical risks and the massive challenges to the previous period of globalisation and peaceful prosperity. We aim to remain astute and flexible and highly risk-aware in an ever-changing and potentially highly challenging investment climate.

Given our outlook, we see the need for precious metals and selective commodities such as energy and resources allocations in portfolios and a more diversified approach than what is commonly relied upon by our industry. We will be willing to look at judiciously increasing equity and credit exposures on a hard landing and cheaper valuations, should the opportunity arise, but are still emphasizing capital preservation and prudent diversification currently given the high risk of global recession and central banks continuing to tighten into a rapidly slowing economy, i.e. central banks risk yet another major policy mistake in the coming month or two which may damage economic growth and asset pricing.

Our Cash Plus portfolio is defensively positioned, while our Short-Term portfolio is relatively defensive, with both designed to be less volatile over shorter-term time periods than our longer duration portfolios – being designed for shorter-term liquidity needs.    

Our more medium and longer-term orientated portfolios target returns and manage risk with longer-term time periods in mind. The Wealth Builder’s larger risk tolerance gives us most leeway to back higher-risk assets based on our insights and research, while still managing risk prudently over a longer-term time frame. There is scope here to increase equity positioning in coming months as opportunities present themselves.

Dynamic Asset’s portfolios are designed to be diversified, but focus on investing where return prospects are assessed as capable of meeting the return objectives of the funds over their respective time horizons. This diversification provides useful mitigation against risk over the appropriate time period consistent with each portfolio’s objective, while our active assessment of risk and return can target capital to where it appears most prospectively and appropriately placed. In this way, we believe we are much more forward-looking than most diversified managers, who tend to be much more biased to what has happened (for example, by relying more upon past correlations and volatility - which may be markedly different from the future). 

We are better diversified than many portfolios as we hold meaningful weightings to ‘hard assets’ in different guises and alternatives, and expect these to provide valuable return and risk contributions over time, even if they are occasionally volatile individually. We believe large and unsustainable debt burdens, demographics, poor government policies and market interference continue to strangle long-term real productivity growth for much of the economy. This potentially bodes relatively poorly for traditional risk assets and index investing, upon which most traditional investment strategies and super funds are heavily dependent. 

We are very concerned by geopolitical risks and the massive challenges to the previous period of globalisation and peaceful prosperity. The increasing risk of major conflicts give further credence to our concerns. We think investors are best served by thinking outside the box in order to better protect and grow their capital, including potentially greater use of selectively chosen value-adding liquid alternatives, along with precious metals exposures and greater weightings to real asset proxies. 

We aim to remain astute, flexible and highly risk-aware in an ever-changing and potentially highly challenging investment climate, and will continue to look to take advantage of the volatility and uncertainty and fear to add value to the portfolios through time.

Volatility was at the forefront in October, with bond yields rallying on a surprisingly hawkish US Federal Reserve, which caught the market offside after many thought inflation had peaked. Equity markets found some support after the selloff in September, with many benchmark indices posting their best monthly performance in some time. In Australia, the bond market rose by +0.92% (Bloomberg AusBond Composite 0+ Yr Index). 

The Reserve Bank of Australia lifted the cash rate by another 50 basis points in early September to 2.35%, as many economists had predicted. However, after remaining relatively steady for a while, yields surged higher following hawkish Fed signalling and dislocation in the UK Gilts market following the release of a widely criticised mini-budget. AU3Y government bond yields reached a high of 3.72% before closing the month 32 basis points higher at 3.52%. Meanwhile, AU10Y and AU30Y yields closed the month up 29bps and 26bps, respectively, at 3.89% and 4.08%.

Hawkish forward guidance from the US Federal Reserve and a surprising UK fiscal package meant the Bank of England had to step into the Gilts market. With policy tightening ratcheting up, increasing the chance of recession, risk appetite soured. Equity markets fell while credit spreads widened. Consequently, the Australian bond market gave back -1.35% in September (Bloomberg AusBond Composite 0+ Yr Index).

The Australian economy advanced by +0.9% over the June quarter, driven almost entirely by consumption and the external sector. Despite extremely soft consumer confidence, increased cost of living worries, and tighter economic policies, momentum appears to be continuing into the third quarter. According to the NAB Business Survey, company conditions, labour demand and capacity usage remained well above long-term averages throughout July and August. In August, employment increased by 33,500 people, with the unemployment rate climbing to 3.5% as labour force participation rose. 

The Australian interest rate futures market anticipates more tightening from the RBA in the months to come. The 90-day bank bill yield rose 61bps to 3.06%, while the 180-day bank bills increased 56bps to 3.57%, implying where the cash rate will be in 90 and 180 days. The cash rate pricing by the end of 2022 sits at 3.32% and 4.10% by mid-2023.

• Global equity benchmarks are on track for the worst annual performance on record
• The US10Y yield had its biggest monthly gain in September 
• Currency wars are driving record swings in global FX markets
• The US Fed has hiked 3% since March, with another 1.25% expected by December 2022
• Economic data continues to reflect slowing growth and high price increases

In September, the major US equity indices lost between -8% and -11%, which is typically the weakest month of the year for US equity performance. The Dow Jones Industrials (-8.8%), which is known for its growth, was the outperformer, while the Nasdaq 100 (-10.5%), which favours development, lagged behind. The S&P 500 (-9.2%) ended at its lowest level since November 2020. By the end of September, all three large-cap benchmarks had fallen below their 52-week lows set in June, meaning there was an increased risk for more decline. This trend was also confirmed by the Dow Jones Transportation Index making new lows.

Growth/Value

Both large-cap and small-cap Growth stocks outperformed Value stocks in September; however, on a YTD basis, Value is still the relative outperformer. The sharp rise in rates has had a greater negative impact on longer-duration growth stocks whose earnings power is further into the future.

US Dollar

The US Dollar Index (DXY) climbed to 17.2% so far in 2022, which is the biggest annual increase since 1967, when the index was first created. The highest annual gain previously was 15.8% in 1981. Emerging market currencies in particular, are struggling to compete against the historical strength of the US dollar. The Japanese Yen has seen a record -25.8% decline, while the Euro and British Pound have declined by -13.4% and -17.5%, respectively. The sharp rise in the value of the global reserve currency increases debt servicing costs and trade for foreigners, which acts as a significant headwind for global economic activity. 

Fixed Income

The US Aggregate Bond Index is down 14.6% so far this year. Since 1976, it has never fallen more than 3%. The Global Aggregate Bond Index has lost 19.9% of its value versus a previous record decline of 5.2% in 1999. There are growing concerns that the steep drop in bond prices might create a "break" in the worldwide financial system, requiring a central bank to pivot as a result. The Bank of England's recent intervention in long-dated Gilts could be seen as the first pivot of some kind of permanent yield curve control from the Central Bank.  

Energy Markets

WTI crude tumbled 11.2% in September, its most significant monthly decline in 2022 and the fourth consecutive month in the red. While inventories remain tight, demand is declining owing to a global recession. Copper (-3%) fell for the sixth month in a row. Gold slid by -3%, while silver advanced by +5.8%.

US Macro

The unemployment rate in the US is still very low, with only 3.7% of people unemployed. This number is near an all-time low for this generation. The ratio of job openings to unemployed people is also at a record high, 2-1. Although average hourly earnings have been rising every month, real wages have decreased by about 4% since June. This could be part of the reason why consumer sentiment has recently hit a record low.

The Months Ahead

The recent worldwide central bank intervention in FX and treasury markets was a direct response to global headwinds such as the sharply rising inflation rates and strengthening US Dollar. The Federal Reserve has barely begun its increased level of quantitative tightening, and its balance sheet is close to $9 trillion. Markets expect another 125 basis points in rate hikes over the last two FOMC meetings in 2022, even though we are still yet to feel the economic impacts of prior hikes. In the meantime, we can't forget about geopolitical risks- for example, look at what happened with the Nord Stream gas pipelines.

Our portfolios had an excellent month in the context of profound weakness in asset markets globally. It was pleasing to see so many of our positions coming together to protect and add value to our portfolios as a whole, while we successfully added to this with our dynamic asset allocation having anticipated and written about how weakness was likely in the month of September.

We continue to believe that over the medium-term inflation pressures will remain somewhat elevated albeit volatile, while real economic growth will remain weak given a relative paucity of productive investment and large debt loads for many economies. We are still very concerned by geopolitical risks and the massive challenges to the previous period of globalisation and peaceful prosperity. We aim to remain astute, flexible and highly risk-aware in an ever-changing and potentially highly challenging investment climate. We continue to look to diversify the portfolios where appropriate and sensible. 

Given our outlook, we see the need for precious metals and selective commodities such as energy and resources allocations in portfolios, and a more diversified approach than what has commonly relied upon by our industry historically. We will be willing to look at judiciously increasing risk asset exposure on any further meaningful sell-off, but are currently positioning the portfolios to continue to protect capital in the event of further equity market weakness.

Our Cash Plus portfolio is defensively positioned, while our Short-Term portfolio is relatively defensive, with both designed to be less volatile over shorter-term time periods than our longer duration portfolios – while being designed for shorter-term liquidity needs.    

Our more medium and longer-term orientated portfolios target returns and manage risk with longer-term time periods in mind. The Wealth Builder’s larger risk tolerance gives us the most leeway to back higher-risk assets on the basis of our insights and research, while still managing risk prudently over a longer-term time frame. There is scope here to increase equity positioning in coming months as opportunities present themselves.

Dynamic Asset’s portfolios are designed to be diversified, but focus on investing where return prospects are assessed as capable of meeting the return objectives of the funds over their respective time horizons. This diversification provides useful mitigation against risk over the appropriate time period consistent with each portfolio’s objective, while our active assessment of risk and return can target capital to where it appears most prospectively and appropriately placed. In this way, we believe we are much more forward-looking than most diversified managers, who tend to be much more biased to what has happened (for example, by relying more upon past correlations and volatility - which may be markedly different from the future). 

We are better positioned for persistent inflationary pressures and geopolitical frictions than many over the medium-term as we hold meaningful weightings to ‘hard assets’ in different guises, and continue to expect these to provide valuable return and risk contributions over time, even if they are occasionally volatile. We believe large and unsustainable debt burdens, demographics, poor government policies and market interference continue to strangle long-term real productivity growth for much of the economy. This potentially bodes relatively poorly for traditional risk assets and index investing, upon which most traditional investment strategies and super funds are heavily dependent. 

We are very concerned by geopolitical risks and the massive challenges to the previous period of globalisation and peaceful prosperity. Wars and recent destruction of crucial infrastructure such as pipelines give further credence to our concerns. We think investors are best served by thinking outside the box in order to better protect and grow their capital, including potentially greater use of selectively chosen value-adding liquid alternatives, along with precious metals exposures and greater weightings to real asset proxies. 

We aim to remain astute and flexible and highly risk-aware in an ever-changing and potentially highly challenging investment climate, and will continue to look to take advantage of the volatility and uncertainty and fear to add value to the portfolios through time.

Our portfolios had a good month despite weakness in equity and bond markets generally. It was pleasing to see our alternatives and commodities and resources positions contributing positively.

We continue to believe that over the medium-term inflation pressures will remain somewhat elevated, albeit volatile, while real economic growth will remain weak given a relative paucity of productive investment and large debt loads for many economies. Hence, we see the need for precious metals and selective commodities such as energy and resources allocations in portfolios. We will be willing to look at judiciously increasing risk asset exposure on any further meaningful sell-off.

We are still very concerned by geopolitical risks and the massive challenges to the previous period of globalisation and peaceful prosperity. We aim to remain astute and flexible, and highly risk-aware in an ever-changing and potentially highly challenging investment climate. We continue to look to diversify the portfolios where appropriate and sensible. 

Our Cash Plus portfolio is defensively positioned, while our Short-Term portfolio is relatively defensive, with both designed to be less volatile over shorter-term time periods than our longer duration portfolios – while being designed for shorter-term liquidity needs.    

Our more medium and longer-term orientated portfolios target returns and manage risk with longer-term time periods in mind. The Wealth Builder’s larger risk tolerance gives us the most leeway to back higher risk assets on the basis of our insights and research, while still managing risk prudently over a longer-term time frame. There is scope here to increase equity positioning in the coming months as opportunities present themselves.

Dynamic Asset’s portfolios are designed to be diversified, but focus on investing where return prospects are assessed as capable of meeting the return objectives of the funds over their respective time horizons. This diversification provides useful mitigation against risk over the appropriate time period consistent with each portfolio’s objective, while our active assessment of risk and return can target capital to where it appears most prospectively and appropriately placed. In this way, we believe we are much more forward-looking than most diversified managers, which tend to be much more biased to what has happened (for example, by relying more upon past correlations and volatility - which may be markedly different from the future). 

We are better positioned for persistent inflationary pressures than many over the medium term as we hold meaningful weightings to ‘hard assets’ in different guises, and continue to expect these to provide valuable return and risk contributions over time, even if they are occasionally volatile. We believe large and unsustainable debt burdens, demographics, poor government policies and market interference continue to strangle long-term real productivity growth for much of the economy. This potentially bodes relatively poorly for traditional risk assets and index investing, upon which most traditional investment strategies and super funds are heavily dependent. 

We are very concerned by geopolitical risks and the massive challenges to the previous period of globalisation and peaceful prosperity. We think investors are best served by thinking outside the box in order to better protect and grow their capital, including potentially greater use of selectively chosen value-adding liquid alternatives, along with precious metals exposures and greater weightings to real asset proxies. 

We aim to remain astute and flexible, and highly risk-aware in an ever-changing and potentially highly challenging investment climate. We continue to look to diversify the portfolios where appropriate and sensible.

August saw the RBA raise the cash rate by another 0.5% which was widely anticipated to 1.85%. Yields rallied in Australia and worldwide later in the month on the back of increasingly hawkish central bank commentary and persistently strong economic data. The 3Y AU Government bond closed the month at 3.2%, while the 10Y (+53 bps) and 30Y (+38 bps) yields closed higher at 3.6% and 3.8%, respectively.

Markets were beginning to think inflation was starting to moderate, and central banks may have to reverse course in August, which guided equity markets higher during the first half of the month. This came crashing down after a hawkish speech from the US Fed chair at Jackson Hole, causing markets to sell off around the world after a strong start. The ASX 200 closed the month at basically flat 6,986 points. The Nasdaq 100 gave back -5.2%, and the Nasdaq Composite fell by -4.6%. The S&P 500 shed -4.2%, and the Dow Jones was softer by -4.1%. The Russell 2000 was one of the relative best performers on the month, losing only -2.2%.

The Australian July Unemployment reading (released in August) came in at 3.5%, slightly lower than the previous month (3.6%). However, the data seemed somewhat skewed due to a dramatic fall in the participation rate (-41,000 jobs) due to COVID illness and school holiday timing. Rising labour costs continue to be a talking point, with wages rising by +0.7% over the quarter and currently sitting at 2.6% annualised.

The July reading of the NAB Business Conditions survey remained high, with capacity utilisation and overall business conditions significantly above long-term averages. Consumer sentiment, however, has fallen to pandemic lows with the rising cost of living starting to hit home. Retail Sales data came in at 1.3% for the month, showing that spending patterns still haven't slowed. Australian interest rate futures are now pricing a cash rate of 3.2% by the end of 2022 and a 3.85% cash rate by the middle of 2023. 90-day bank bill yields sitting at 2.45% (+34 bps), while the 6-month bank bills have a yield of 3.0%. 

August 2022 Summary

• The US Dollar now trades at a 20-year high
• US yield curve has remained inverted in August
• Stock markets sold off late in the month after a strong start 
• US CPI sits at an annualised rate of 8.5%, after a 9.1% peak in June
• Central Banks are willing to risk a hard recession to tame inflation 

After bottoming in June, Equity prices steadily increased throughout July and early August. This was in part due to the misperception that inflation had peaked. From the low in June to the high in Mid August, the S&P 500 Index saw returns of over +17% and the Nasdaq 100 Index did even better, with 21% growth during that time. However, this rally came to an end on August 26th with its untimely demise attributed to Federal Reserve Chairman Powell's hawkish speech given at the Jackson Hole Economic Symposium later that day.

The Federal Reserve will continue to employ tight monetary policy "for some time" to bring down inflation, according to Chair Powell. He also warned that switching course too soon may result in similar levels of inflation experienced four decades ago when inflation reached above 14% in 1980. The Chair added, "While higher interest rates, slower economic growth, and softer labour market circumstances will reduce price inflation, they will also cause pain for households and companies. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain."

US Government Bonds

The current yield on the benchmark US 10Y Government bond is 3.12%, down from its June peak of 3.49%. The US 30Y yield traded back above 3% early last month and remained higher at 3.22%. Yields on shorter-term US 2Y touched 3.50% after Powell's comments at Jackson Hole, which matched the highest rate since the GFC in 2008. The US 2Y yield is currently higher than the US 10Y yield, meaning that the yield curve remains inverted, which has been a signal for a recession in the past.

Volatility Index

Volatility measured by the VIX index lifted after Fed Chair Powell's speech at Jackson hole late in the month of August to close around the 26 level. The VIX index, often referred to as the "Fear and Greed Index", was below 20 around the middle of the month. A lower VIX index is typically supportive of risk appetite. 

Petrol Prices

The average cost of a gallon of regular gasoline in the US is now at $3.83, down 9% on the prior month or 0.37 cents, according to AAA data. Oil prices traded lower in the month of August, falling 7.4%. West Texas Intermediate (WTI) touched a high of $123.50 in March this year, which was 14-year highs (now -25% from that point). 

The US Dollar 

Hot inflation and the rising rate environment have continued to give wings to the US Dollar rally. The Greenback, which is the world's reserve currency, traded to 20-year highs above $109 during the month. The US Dollar Index is +13% since the start of 2022. 

Bitcoin

Since the all-time highs in November 2021, Bitcoin is down over -70%. The virtual currency traded up +3% during the start of August before reversing with the risk-off swing to close the month -15%. 

The Months Ahead

The Equity market rally spurred by the peak inflation theory reversed at the end of the month. Fed Chair Powell's aggressively hawkish speech on inflation, markets and jobs caught the market by surprise, and the sellers were in control to close out the month. The next set of important economic data out of the US will come later in September, with the interest rate decision on the 21st and the CPI reading on the 13th.

Our portfolios posted modest returns over the month as low equity allocations kept returns modest in the face of rallying equity markets. The market is fluctuating between inflation and growth concerns as the short-term outlook remains unknown.

We continue to believe that over the medium-term, inflation pressures will likely remain somewhat elevated compared with recent decades and that financial repression will be the preferred path forward for central banks (keeping yields lowish and positive inflation and asset pricing). This is because the alternative of a deflationary collapse is highly undesirable to policymakers. We expect it won’t be long (weeks or months) until policymakers signal a less hawkish stance towards markets feeling forced to do so in the face of political pressure, slowing economies and/or further economic crises.   Hence, we see the need for precious metals and selective commodities such as energy and resources allocations in portfolios. We are more interested in looking to increase risk asset positioning judiciously on any sell-off than selling after losses.

Our Cash Plus portfolio is defensively positioned, while our Short Term portfolio is relatively defensive, with both designed to be less volatile over shorter-term time periods than our longer duration portfolios and for shorter-term liquidity needs.    

Our more medium and longer-term orientated portfolios target returns and manage risk with longer-term time periods in mind. The Wealth Builder’s larger risk tolerance gives us most leeway to back higher risk assets on the basis of our insights and research, while still managing risk prudently over a longer-term time frame. There is scope here to increase equity positioning in the coming months as opportunities present themselves.

Dynamic Asset’s portfolios are designed to be diversified, but focus on investing where return prospects are assessed as capable of meeting the return objectives of the funds over their respective time horizons. This diversification provides useful mitigation against risk over the appropriate time period consistent with each portfolio’s objective, while our active assessment of risk and return can target capital to where it appears most prospectively and appropriately placed. In this way, we believe we are much more forward-looking than most diversified managers, which tend to be much more biased to what has happened (for example, by relying more upon past correlations and volatility - which may be markedly different from the future). 

We are better positioned for inflation than many over the medium term as we hold meaningful weightings to ‘hard assets’ in different guises, and continue to expect these to provide valuable return and risk contributions over time, even if they are occasionally volatile. We believe large and unsustainable debt burdens, demographics, poor government policies and market interference continue to strangle long-term real productivity growth for much of the economy. This potentially bodes relatively poorly for traditional risk assets and index investing, upon which most traditional investment strategies and super funds are heavily dependent. 

We are very concerned by geopolitical risks and the massive challenges to the previous period of globalisation and peaceful prosperity. We think investors are best served by thinking outside the box in order to better protect and grow their capital, including potentially greater use of selectively chosen value-adding liquid alternatives, along with precious metals exposures and greater weightings to real asset proxies. 

We aim to remain astute and flexible, and highly risk aware in an ever-changing and potentially highly challenging investment climate. We continue to look to diversify the portfolios where appropriate and sensible.