One of the new terms that some dictionary editors decided was word of the year for 2020 was doomscrolling. Wikipedia says doomscrolling is spending an excessive amount of screen time scrolling through dystopian news.

Given that we all did a fair bit of that in 2020, it’s good to clear our heads of the negativity and look up from our screens. There’s a bigger picture we all need to take in.

Planned vaccine rollouts are promising to be the shot in the arm we and the economy need. There will still be lockdowns in different regions over the next 12months, but the severity of the lockdowns may start to diminish as vaccine distribution increases.

The speed of recovery will vary by sector. Some sectors, like online retailing, have actually benefited from Covid disruption.

Already we are seeing green shoots of recovery. In emerging markets, export growth is moving back into positive territory. In a number of developed markets, auto sales are moving back to pre-Covid levels. Global manufacturing and service PMIs are heading in the right direction too.

This all indicates that economies are on the mend. Of course, it’s not all sunny skies. A weak US Dollar is good for the American economy, but it is putting pressure on Australian exports.
We have the official cash rate at a mere 0.1%. This is terrible for savers, and the RBA is targeting the same rate for government bonds under its three-year yield curve control program. Unemployment is high in many countries. This means that central banks will continue to do ‘whatever it takes’ to stimulate jobs growth.

We’re also seeing low rates creating skews in the market. Valuations of some sectors are extremely high and seem to be driven by momentum rather than fundamentals.

So, what does this mean from an asset allocation perspective? An important consideration when deciding on asset classes is income generation. Many investors rely on income generated by portfolios to fund or supplement their living expenses. That’s why the fully franked yield on local shares remains very attractive. Real estate investment trusts (A-REITs) can provide positive yields and these look promising when compared to both bonds and the broader ASX market.

Still, constructing portfolios that can generate reasonable income and weather bouts of volatility in a world of very low cash rates and bond yields, is a challenge. The important thing from our perspective is to be disciplined and measured in our approach.

The potential range of outcomes are wide and we are arguing against aggressive positioning from a risk allocation perspective. We think it is prudent to be neutral versus the strategic asset allocation benchmarks across the various model portfolios. Across the individual asset classes, we have however reduced the weighting to cash to reposition for the ongoing recovery, while increasing the weightings to both fixed interest and listed property.

If you would like more information please call 1300 ELSTON or contact us to speak to one of our advisers.