A month ago, I wrote that it was a good time to take some profit. While markets have dropped a little since then (around 5%) by almost any measure, share markets globally remain fully valued. We took some profit, not because I have any great prediction to make about what is going to happen next in markets. Rather, it is simple risk management to allocate capital in a prudent way.
But what next?
Markets have performed very well over the past 12-18 months. To the point where we find stock markets well above their pre-pandemic levels. That alone tells me that either markets have run too far or that governments have over done the stimulus. In reality it is probably a little bit of both.
As such we hold more cash in our portfolio’s than we would like. But at the moment I think that is sensible. Ordinarily we might allocate more to bonds but with interest rates as low as they have been for as long as they have been govt bonds are even more fully valued than shares.
As far as an investment goes, cash is currently terrible. Basically, no return and in real terms, taking into account inflation, you are going backwards. However, from a portfolio perspective I am comfortable holding cash where there is increasing volatility and uncertainly, which is what we are starting to see.
There’s a lot going on in the world at the moment that reflects the increasing strain globally stemming from both recent (Covid) and past events (GFC). In addition to the full valuations on stocks, we are also now seeing an increasing range of risks emerging.
Domestically, we are adjusting to slower growth from China, lower demand for iron ore, and now regulators & banks targeting property.
Globally, we are seeing skyrocketing energy prices and emerging energy crises in various parts of the world, supply chain issues, semiconductor shortage, China property and debt concerns, US debt ceiling, China / US tensions and concerns around rising bond yields & inflation.
Each taken individually appear manageable but as a collective the story emerging is that the world is a little out of whack (more than usual). Coming out the other side of a once in a generation pandemic, this is not unreasonable. Many of these issues are symptoms of the same problems, other are not.
So, we have fully valued markets and a global economy trying to digest almost 2 years’ worth of disruption, stimulus and stops & starts. It’s just common sense to have a little extra allocated to cash. Good performance gave us the opportunity to take some profits.
Obviously, I’d like to deploy that additional cash into investments, but there’s no rush. Opportunities will arise. Regardless of what markets do next there will always be individual investments or sectors that are underpriced or present an opportunity. This is especially true when uncertainty his higher.
While we have increased our allocation to cash, I remain bullish on the long-term prospects of the global economy and share market. Our allocation to both domestic and global equity markets reflect this.
But for now, we are busy being patient.
This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you.