In a half-year review of market risks and opportunities, Harbour Asset Management has tipped shares to play a quieter game over the following six-months compared to the goal-fest of 2023 to date.
“Looking forward to the rest of the year, we think the path higher looks tougher. Positioning is back to more normal levels and is, in fact, stretched in some areas of the market,” the Harbour note says. “… Valuations, whether based on the equity risk premium (sitting at 100th percentile compared to the last fifteen years) or Price to Earnings ratio (sitting at 82nd percentile compared to the last fifteen years) are not at attractive levels, acknowledging valuations are a poor timing tool.”
But if investors are looking to sub-off equities, bonds will remain on the pitch both for reliable mid-field income-supply and some protection against the long ball.
“While long-dated bonds may be subject to weakness as investors demand more compensation for uncertainty, short-dated bonds offer great value with yields at elevated levels,” the half-year analysis says. “We think bonds continue to serve a useful purpose in a 60/40 portfolio, as we did at the end of last year.”
The report – penned by Harbour multi-asset portfolio manager, Chris Di Leva, and Hamish Pepper, fixed income strategist – says with bond benchmark running yields of 3.5-5 per cent “well above neutral rates of interest”, duration should come into its own amid any negative surprise.
“This suggests that bonds continue to offer good levels of income and the ability to provide capital gain should yields fall more quickly than markets anticipate,” the note says. “March’s flight to safety, as investors worried about banking contagion, provided a live example of the defensiveness bonds offer as downside protection.”
Overall, Di Leva said Harbour favoured bonds over shares in its multi-asset portfolios with a preference for growth on the equities end.
He said the unexpected bullishness of share investors over the first six months of 2023 compared to the downbeat mood coming into the year was likely based on a number “left tail risks” being discounted and upside earnings results.
As well as the traditional bonds-equities recap, the Harbour report cites stubborn US inflation, Chinese economic woes and a hawkish outlook for NZ rates as key risks for investors to consider as the rest of 2023 unfolds.
“The market implies a more than 50% chance of another 25bp hike by the RBNZ in October and incorporates just 80bp of cuts by the end of 2024, to an OCR level of 4.8% that is still highly restrictive,” the note says.
At the half-way point, the investor consensus is much more sanguine than Harbour picked up in its 2023 pre-match forecast of the top 10 risks and opportunities for the year ahead.
“This again reminds us that the greatest risks and opportunities in markets arise from consensus views, which ultimately prove incorrect and spur repricing,” the June-end update says.
Time for some oranges, perhaps.