Macro and Australian equity strategist, Macro Strategy Advisors

Shane Lee

Macro and Australian equity strategist

Macro Strategy Advisors

Cross Asset Strategy

<ul>
<li>
Tracking Benchmark during the Correction and Now looking for Alpha. Our model portfolio has performed in line with the benchmark over the past couple of months, with strong outperformance in January giving way to modest underperformance in February and March.  Our tilt towards Growth drove the outperformance as the Fed announced it would keep policy on hold.  The US yield curve remains positive showing the cycle is not at its end.  Value’s rebound in February and March has been unconvincing and driven by beaten up Consumer Discretionary stocks such as HVN and SUL and low PE defensive plays.</li>
<li>
We Move Overweight Resources and Pull our Banks Exposure Back to Underweight: Key bulk commodity prices are holding up against the Chinese economic slowdown.  But policy is mobilising to reduce the risk of a further sharp slowdown in growth.  The prospect of a rate cut by the RBA is providing a timely boost for the sector via a weaker currency that could be in a sweet spot if global growth has bottomed.</li>
<li>
Cutting Exposure to the Banks. Some uncertainty has now been removed following the release of the Final Report from the Banking Royal Commission and there is some anecdotal evidence that the Banks are returning to the lending business after withdrawing last year, but it’s early days.  Consequently, there seems little upside to low-single-digit EPS growth over the medium-term.  Auction clearance rates in both Sydney and Melbourne remain low and consistent with smaller price declines than last year.  However, the labour market has remained resilient and provides a more positive assessment of economic conditions than the GDP data. </li>
<li>
Trimming Industrials. We are not trimming our exposure to industrials because we are overly bearish on the domestic economy but because we think it’s best to make room in this sector to build up our Resources barbell.  We remove ABC, DLX, IPL, and ORA and include BIN. </li>
<li>
Opportunities in the Consumer Space. We add BAL in Consumer Staples and WES in Consumer Discretionary.  There is a risk including BAL into the portfolio, but we think it is positioning itself for strong longer-term growth.  The share price has rallied strongly in the past couple of weeks, but it will need to be supported by approval from China to sell its product.  The performance of A2M shows the opportunity that is on offer.  WES Bunnings business is performing well, despite a weak consumer.  K Mart seems to be performing better than its Big W. </li>
<li>
Keeping our raised Property Weighting. Property worked well as bond yields rallied last year and while we don’t expect strong returns to be repeated, it is good practice to have an overweight to the sector, given the global economic cycle is mature.  It should continue to provide protection to the portfolio in the event of raised uncertainty.</li>
</ul>



Tracking Benchmark during the Correction and Now looking for Alpha. Our model portfolio has performed in line with the benchmark over the past couple of months, with strong outperformance in January giving way to modest underperformance in February and March.  Our tilt towards Growth drove the outperformance as the Fed announced it would keep policy on hold.  The US yield curve remains positive showing the cycle is not at its end.  Value’s rebound in February and March has been unconvincing and driven by beaten up Consumer Discretionary stocks such as HVN and SUL and low PE defensive plays.

We Move Overweight Resources and Pull our Banks Exposure Back to Underweight: Key bulk commodity prices are holding up against the Chinese economic slowdown.  But policy is mobilising to reduce the risk of a further sharp slowdown in growth.  The prospect of a rate cut by the RBA is providing a timely boost for the sector via a weaker currency that could be in a sweet spot if global growth has bottomed.

Cutting Exposure to the Banks. Some uncertainty has now been removed following the release of the Final Report from the Banking Royal Commission and there is some anecdotal evidence that the Banks are returning to the lending business after withdrawing last year, but it’s early days.  Consequently, there seems little upside to low-single-digit EPS growth over the medium-term.  Auction clearance rates in both Sydney and Melbourne remain low and consistent with smaller price declines than last year.  However, the labour market has remained resilient and provides a more positive assessment of economic conditions than the GDP data. 

Trimming Industrials. We are not trimming our exposure to industrials because we are overly bearish on the domestic economy but because we think it’s best to make room in this sector to build up our Resources barbell.  We remove ABC, DLX, IPL, and ORA and include BIN. 

Opportunities in the Consumer Space. We add BAL in Consumer Staples and WES in Consumer Discretionary.  There is a risk including BAL into the portfolio, but we think it is positioning itself for strong longer-term growth.  The share price has rallied strongly in the past couple of weeks, but it will need to be supported by approval from China to sell its product.  The performance of A2M shows the opportunity that is on offer.  WES Bunnings business is performing well, despite a weak consumer.  K Mart seems to be performing better than its Big W. 

Keeping our raised Property Weighting. Property worked well as bond yields rallied last year and while we don’t expect strong returns to be repeated, it is good practice to have an overweight to the sector, given the global economic cycle is mature.  It should continue to provide protection to the portfolio in the event of raised uncertainty.


Resetting the Compass: ASX Model Portfolio Update - March 2019