Salt Funds Management is tilting offshore exposures away from equities and towards fixed income in its global funds as financial and geopolitical conditions point to a “choppy” year ahead.
The Salt Global Outlook published last week notes that as “positive tailwinds fade” for growth assets there were emerging opportunities for “select” income assets.
Greg Fleming, Salt head of global diversified funds, says in the report: “In our Sustainable Income Fund, we continue to diversify via superior yield sources into the global bond markets and will begin incrementally moving from neutral, to a small overweight position in global fixed income securities.
“In our Sustainable Growth Fund, we will look for opportunities to lower the International Equity exposure a little further, as we believe there is presently too much market trust in ‘Trump and Tech effects’ and that scope for disappointment is elevated.”
But Fleming says while fixed income yields moved sharply upwards in the latter part of 2024 it was still “demonstrably too early” to pile into international bonds.
“We believe that the optimal point to go overweight bonds will likely arrive by mid-2025, once inflation disruptions fade out and the US economy enters a slow-down,” he says. “Our own portfolio also remains strongly biased to short duration assets, which assists given global yields have jumped most sharply in the 5-year to 30-year maturities (a ‘bear steepening,’ in market parlance.)”
Nonetheless, US markets present investors with a dilemma during an unusual period where the equity risk premium has turned negative – or bonds yielding more than shares as measured against both dividends and earnings.
“Another way of looking at this historically rare development is that investors are now willing to ‘pay’ to take on equity market risk, rather than to ‘be paid’ to do so,” Fleming says.
“Other things being equal, that suggests euphoria and does ring some alarm bells about investors’ capacity to endure any period of flat or bearish equity market returns with fortitude. Investment discipline is presently locked in an epochal tussle with a one-directional trader mentality (favouring perpetual dip-buying) and easy retail access to options markets.”
Salt is also weighing up the merits of “dynamically hedging” global shares in its Sustainable Growth fund after the NZ dollar suffered a significant downgrade versus most major currencies last year.
In fact, the weak kiwi proved a boon for local holders of offshore equities last year, spicing up the more than 19 per cent performance of the US dollar-denominated MSCI World Equities index to 34 per cent in NZ currency terms.
“This scale of positive reinforcement, whereby a strong offshore market rally has returns bolstered by our home currency’s sharp depreciation, is a pleasant portfolio returns sweetener,” Fleming says. “All the same, such phases only occur sporadically and tend to develop when there are marked divergences in economic health between countries and regions.”
Local equities, meanwhile, show improving fundamentals that support the case for lifting “allocations withing multi-sector portfolios” even as the NZ economy continues to face challenges.