Getting tired of Goldilocks

What does Goldilocks look like, exactly, anyway.
David Berthon-Jones

Aequitas Investment Partners

You've heard the term; what does it look like in picture form? And why convert a nice and simple phrase back to pictures anyway?

Because a picture tells a thousand words.

The first idea is that interest rates have essentially peaked, and will fall from here, over the next few years.

Those rates can fall because the Fed will have succeeded in taming inflation.

As a result of rates and inflation falling, unemployment will stay low, rising only a touch over the forecast period.

Consequently, corporate profits will continue to grow.

So that's Goldilocks. 

But scroll your eyes back up to that unemployment line. Using the grey bars (which depict recessions), just estimate (eyeball) the number of times in which the unemployment rate rose only by a small amount, similar to that forecast (the pink line).

I imagine you did not find one. When it goes up, it tends to go up by a lot. It tends not to behave. 

So the rosy forecast that is the markets baseline (how it is positioned) is a scenario that hasn't played out before.

Now, there's plenty of good reasons to be bullish, emerging market equities are cheap relative to their histories, European corporates (and the region at large) have weathered incredible supply chain disruptions very well, credit defaults remain low, employment almost everywhere is fantastically strong, China reopened, lots of good things.

But we certainly have the above in the back of our mind, with regard to asset allocation. Rate hikes delivered to date have seen US nominal GDP growth rates decline by double digits (as in, 500bps+ of rate hikes have moved NGDP growth from +17% to 7% yoy, strong, to be sure, but does it now overshoot).

And that tempers our enthusiasm, for positioning "too bullishly", in the current environment. To our mind, better to have plenty of defensives on, in a diversified portfolio, to provide ballast and firepower, when required. 

This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only. This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein. Please note that past performance is not a reliable indicator of future performance. General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement (PDS) or Investor Directed Portfolio Service Guide (IDPS Guide) and consider talking to a financial adviser. Taxation warning: Any taxation considerations are general and based on present taxation laws and may be subject to change. Aequitas is not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and investors should seek tax advice from a registered tax agent or a registered tax (financial) adviser if they intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.

David Berthon-Jones
Co-Chief Investment Officer
Aequitas Investment Partners

David is Co-CIO of Aequitas Investment Partners with Dr Rowan Stewart. David and Rowan are responsible for investment strategy and the delivery of reliable, cost-effective multi-asset, and direct equity portfolio solutions to Advisers, Dealer...

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