Nick Dignam from Fortitude Investment Partners shares insights with Lachlan Maddock from Fortitude Investment Partners on how a diversified portfolio in mid-market private equity is structured. The Inside Adviser
The world of alternative investments is at a crossroads. As markets defy expectations and liquidity concerns take centre stage, investors find themselves forced to rethink how they deploy capital in an increasingly complex environment.
Positioning portfolios for fabled ‘soft landing’
While several weeks ago now, the threat of 75 basis point hikes is no longer in the future, it has and will likely happen more than once in 2022. Essentially, the Federal Reserve and other central banks, including the RBA, are tiptoeing the line of fighting inflation without sending the economy into recession. This was among the many reasons that the market initially reacted positively to the unprecedented 75 basis point hike.
The announcement was delivered alongside a reduction in forecast growth and inflation for the US economy and an expectation by the Federal Reserve that unemployment may not need to rise much, if at all, to achieve the ‘fabled’ soft landing. According to Kerry Craig of JP Morgan, the forecast reduction in growth to 1.7 per cent and PCE inflation to 2.7 per cent in 2023 gave hope that it may be achievable.
However, Craig highlights the real-world challenge, being that “the only way the Fed will really contain inflation is through demand destruction, which increases the risk of a recession and higher unemployment rate. The question, therefore, is what to do with portfolios amid such a large degree of uncertainty. JP Morgan is advocating a four pronged approach at this difficult juncture.
They suggest investors “should actively consider their duration exposure and whether to start adding higher quality intermediate to longer dated government bonds” with a view that these now offer a greater hedge against further market downside.
Similarly, “credit spreads have widened” but corporate positions remain strong. Craig suggests the “credit market may feel less pain than equities, should the earnings outlook deteriorate” along with lower growth expectations. They favour investment grade bonds over developed market equities.
The opportunity set is growing in China and the Asian region, despite the slow reopening of the Chinese economy. Monetary and fiscal support along with “very low equity multiples” bodes well for longer term investors able to stomach the short-term COVID uncertainty. This is further supported by strong domestic demand in broader Asian markets suggesting “room for upside” once risk appetite returns to equity investors.
But beware a rising US dollar, which combined with tightening financial conditions and the removal or liquidity could pose a headwind for both emerging market debt and currencies.
