A broad disparity of views underpins VIP’s ongoing caution!
Global Equity markets rallied through the March quarter shrugging off Bond market
concerns about pending recession. The disparity between the two markets is a global phenomena which at very least reflects heightened uncertainty and at worst a protracted recession. Underpinning the bond markets pricing in of a recession is the ongoing issue of inflation. Inflation appears to have peaked in most countries (fuelling equity market performance), however it remains too high. The bond market (as reflected by inverted yield curves) is concerned with how long inflation will remain sticky, how central banks will respond and how much damage they will do trying to combat it by raising rates. VIP interprets the discrepancy as reflecting bond markets have high conviction in a recession while equity markets are just not quite ready to factor it in.
Despite our cautionary positioning, VIP’s portfolios performed well
The disparity between markets underpinned VIP’s caution in how we positioned the
VIP portfolios. We maintained high cash levels and a generally defensive positioning across the portfolios through the March quarter which curtailed performance, but our flagship growth fund still delivered 3.77%. The key performers for the portfolios over 1Q23 were overweight positions in international equities and resources. VIP portfolios also benefitted from being underweight real-estate, however the REITs we did hold underperformed.
Economic uncertainty continues to prevail
While inflation is starting to look as though it may have peaked and the threat of recession keeps getting pushed out there is a plethora of widening data points that are of concern, hence the inverted yield curve and VIP’s ongoing caution. Despite months of increasing rates the real impact of higher rates was just beginning to be felt in the March quarter. US regional banks and Credit Suisse were the most high-profile early casualties, however the impact is being felt across all industries and all key countries. While sales have typically been resilient margins are threatened, US and European PMI data and non-farm payroll data does not look good and multiple employment gauges show a cooling of labour demand.
Protecting capital is always VIP’s key focus
Equity markets having regained much of the losses experienced at various points over 2022 and once again look relatively highly priced, which if the bond markets prediction of recession comes through makes them susceptible to a correction. VIP portfolios consequently continue to have relatively high cash levels and to be defensively positioned with a heightened level of relatively safe bonds and xx equities such as resources (such as Lithium, copper and iron ore) and financial stocks which continue to be preferred over technology and discretionary stocks. Consequently, despite the prospects for global stagflation (inflation and recession) VIP remains comfortable with the positioning of your portfolio for 2023, including its defensiveness and opportunity to take advantage of cheaper equities when markets adjust.