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Lonsec   ⟩   News & Insights   ⟩   News   ⟩   Are we late cycle?
Lukasz de Pourbaix

AuthorLukasz de Pourbaix

TitleChief Investment Officer, Lonsec Investment Solutions

DateJanuary 10, 2019



2018 was marked by a notable increase in market volatility and a decline in global economic growth from its previous high in the first part of the year. This has been reflected in a pull-back in most equity markets and an increase in expected volatility.

This article is intended for licensed financial advisers only and is not intended for use by retail investors.

Welcome back and we wish you all a healthy and prosperous 2019.

2018 was marked by a notable increase in market volatility and a decline in global economic growth from its previous high in the first part of the year. This has been reflected in a pull-back in most equity markets and an increase in expected volatility.

The increase in volatility has been the culmination of a number of factors including:

  • increased geopolitical tensions, primarily in the form of protectionist measures by the US with its key economic partners China and Europe,
  • a normalisation of interest rates in the US,
  • tightening of liquidity, and
  • idiosyncratic issues impacting specific stocks and sectors such as the technology sector, which was a key growth engine of the US market.

On the home front we have seen house prices decline causing concerns on the possible impact on the broader economy.

The current environment comes off a period of extraordinary market returns supported by accommodative monetary policy, liquidity being pumped into global markets via quantitative easing as well as some sugar hits in the form of corporate tax cuts in the US. We believe that we are in the late stages of the cycle. However, late cycles can vary in their duration. According to analysis conducted by Heuristics Analytics, who input into our Lonsec investment committee process, late cycles have lasted as long as five years in the 1960s when productivity was strong and wages and inflation were low, and more than three years in the 1990s. Beyond these long late cycle environments typically late cycles have lasted for 12 to 18 months.

While we see economic and liquidity conditions becoming more challenging we do not think that we have reached the tipping point in terms of the economic cycle. We are also beginning to see some value appear in markets however we think it is too early to allocate to some of these areas at this point. From a portfolio perspective we have maintained our active tilt to alternative assets with a neutral allocation to equities. The exposure to alternative asset is intended to provide additional diversification where volatility has increased in traditional asset classes.

From an investment selection perspective we continue to look to further diversify our portfolios. Within our direct equity portfolios, we are seeking opportunities to diversify stock and sector exposure, recognising the concentrated nature of the Australian equity market. We have also taken advantage of the increased market volatility to invest in what we believe to be quality companies at attractive prices. An example of this has been the allocation to Costa Group, which we invested into after the stock retreated by approximately 30%. Within our multi-asset portfolios we have been focusing on fund managers with active strategies that we believe will be able to take advantage of the increased market dispersion.

By Lukasz de Pourbaix

This article has been prepared for licensed financial advisers only. It is not intended for use by retail clients (as defined in the Corporations Act 2001) or any other persons. This information is directed to and prepared for Australian residents only. This information may constitute general advice. It has been prepared without taking account of an investor’s objectives, financial situation or needs and because of that an investor should, before acting on the advice, consider the appropriateness of the advice having regard to their personal objectives, financial situation and needs.


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