Turning points - the importance of a dynamic approach to managing your money

July was a month of change. In New Zealand and the United States inflation ticked decisively lower and in the US signs of economic weakness emerged. This put central bank rate cuts on the table and led to a dramatic shift of leadership in share markets. Tech stocks fell, interest rate sensitive stocks rose and smaller companies, having been a dramatic underperformer for years, rallied strongly. It felt like a turning point. Being positioned for changes in markets and economies is central to what we do as an investment manager. Read our current thinking and how it impacts how your portfolio is invested. The most important takeaway is that set and forget doesn't work. Investment success comes from being dynamic, responding to market conditions, managing risk and embracing opportunities.

What a month. After the first half of the year which was dominated by strong share price performance by the so called 'Magnificent 7', the group of mega cap technology companies like Nvidia, Amazon, Meta platforms and Apple, momentum swung back towards the unloved parts of the market.  

Lower inflation, weaker economic growth in the United States and over hyped expectations going into the most recent corporate earnings reporting season all conspired to change market leadership. Tech stocks fell, Nvidia for instance slipped by -5.3% for the month. While tech struggled it was the year's laggards that caught a bid and performed well. Companies that tend to perform well when interest rates fall, like real estate and utilities, rallied strongly both in the US and in New Zealand. For instance, in New Zealand the share price of real estate company Kiwi Property Group, that had been a poor performer year to date, was up 8.4% for the month. 

Interest rates fell over the month as investors priced in lower inflation and room for central banks like the Reserve Bank of New Zealand to cut official cash rates. This boosted returns of defensive assets like bonds driving returns for conservative investment strategies. 

Managing money is an exercise in dynamism. Markets, economies and prices are always changing. This presents both risk and opportunities. Correctly position portfolios for these changes and long-term returns can be enhanced. Being on the wrong side of them can be painful. 

But it isn't easy. Predicting the precise direction of the economy, zeroing in on key macro-economic data points, like the next inflation print, and understanding how these will influence market sentiment is hard, particularly in the short term. 

We don't play that game. We take a longer-term view, blending insights on the general direction of the economy, overlaid with our megatrend thesis and a view on current asset prices to form a general sense of the direction of travel for each asset class. In short, we seek to be directionally right rather than get overly precise in trying to predict every single small change in market conditions. 

In our view this approach generates much more consistent returns over time, enables us to avoid unnecessary risk and is a smarter way to manage your money. 

1. We like emerging market shares.

In the most recent change to our strategic portfolio positioning, we increased exposure to emerging market shares. This reflects our view that emerging market shares will outperform developed markets supported by more reasonable valuations, as well as more attractive demographics which BlackRock describes in its "Demographic Divergence" mega forces framework. 

2. We are still cautious about inflation although happy to lock in current long-term interest rates particularly in New Zealand.

We are still somewhat cautious about the outlook for interest rates with a higher for longer inflation thesis, but we are conscious that interest rates have risen a lot in recent years. The upshot of this is that we are comfortable owning more long-term bonds. We prefer New Zealand fixed income owing to the weakness in our economy which we believe is not fully reflected in current fixed income pricing. 

We still retain a position in inflation linked bonds in both the United States and New Zealand. Inflation linked bonds provide protection should inflation continue to be stronger than expected and are, in our view, attractively priced given that this is still a genuine risk.

3. We still like gold, although have trimmed portfolio exposures.

We continue to include an allocation to gold in portfolios. Gold acts a diversifier and should perform well if geopolitical risk increases, a definite concern as we scan the world right now. That said gold has performed strongly over the last year, up nearly 30% in New Zealand dollar terms, so we have marginally trimmed portfolio exposures. 

4. Listed infrastructure offers the highest expected return in the investable universe, we are looking at it closely.

Each quarter we review the prospective returns for each asset class we could invest in. Listed infrastructure, which includes assets like railway companies, cell phone towers and electricity utilities, has drifted to the top of the expected return table. This reflects the fact that these companies have been underperformers in recent years as the market focussed its attention on technology shares. 

Underperformance often sows the seeds of future strong returns. This seems to be the case for listed infrastructure. This is a strong candidate for inclusion in portfolios. Watch this space.

This material provides general information only. This material is not a financial product recommendation or an offer or solicitation with respect to the purchase or sale of any financial product in any jurisdiction.

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