The Morningstar NZ asset allocation panel has slightly pared back exposure to global shares in favour of domestic fixed income at its latest quarterly meeting.
In its NZ Quarterly Economic Briefing published last week, the Morningstar expert panel – which sets the asset allocation model for financial adviser clients – kept settings pretty much on hold.
“However, members did take on board the rising probability the global expansion may be nearer to its ‘sell by’ date and trimmed back the allocation to international equities, taking it back to a netural benchmark allocation,” the Morningstar report says. “The panel opted to move 1% from international equities to domestic fixed interest, which offered a tolerable running yield.”
According to the Morningstar panel, while the global economy, particularly the US, would still “chug on” a number of risks were looming such as rising inflation and interest rates in the US, simmering trade wars, geopolitical tension and potential financial ‘contagion’ in emerging markets.
The tilt away from global shares was also reinforced by a view that the NZ dollar had bottomed-out, negating the case for full exposure to unhedged offshore equities, which was “the only asset… that would benefit from a weaker New Zealand dollar”.
“This time round, members felt the New Zealand dollar had effectively dropped as much as it was going to (give or take), which meant that the foreign exchange case of international equities was not quite as robust as previously,” the report says.
Across all NZ model asset allocations, Morningstar remains overweight to income assets (3 per cent above target) and skewed to domestic over global exposures by 4-5.4 per cent.
The panel also highlighted a growing divergence between economies and asset classes following years of highly-correlated upbeat trends.
“So, there are pockets of value, some good, some less good. It’s meant tactical trading, where asset managers will have to hunt out particular sectors, or particular regions, or particular companies,” a panel member said. “That’s where you find some good alpha.”
Divergence was also appearing in the NZ share market, Morningstar says, with a growing “disconnect” between the top 50 companies, which seemed in good shape, and smaller firms that were more vulnerable to a slow-down.
“But members were nonetheless somewhat cautious about the outlook for profitability and were also concerned about stretched equity valuations [of all NZ equities],” the report says.
The Morningstar panel comprises: economist Donal Curtin; Matthew Goldsack, BT Funds NZ head of investment solutions; Brad Bugg, Morningstar Investment head of multi-asset income; and, Stuart Millar, ANZ head of diversified portfolio management.