The one asset class to invest in for the next 12 months (and other allocation insights from one of the best)
Alexandre Ventelon, the Head of Research and Investment Strategy for Morgan Stanley Wealth Management is a young man enjoying an impressive career. His range of expertise (multi-asset portfolio management? Check. Investment strategy? Check. Economic research and quantitative analysis? Ditto) is truly considerable - as is the distance he has covered acquiring and deploying it.
After Alex left his native France in 2006 (with a Master in Management from Toulouse Business School and a Master in Portfolio Management from the University of Paris XII in his back pocket), his work has taken him to Luxembourg, to Singapore and back, and, since 2011, Sydney.
Along the way, he's held senior positions with Credit Suisse and Australian Super, before landing at Morgan Stanley Wealth Management, in 2017, where he has made an award-winning splash (as the 2020 and 2021 winner of the Institute of Managed Account Professionals (IMAP) Licensee Managed Account category and winner of the 2021 Multi Asset Class category).
I learned a lot from Alex while conducting the interview for this profile, and I hope it comes through. For example, it was a privilege to be able to ask someone who has spent a career working in portfolio construction and specialising in multiple asset classes, exactly where he is allocating right now.
We also touched on the current inflation fears, why Morgan Stanley is not convinced about the likelihood of a US recession and Alex gave his views on whether investors should or shouldn’t rejig their portfolios.
He also spoke in detail about:
- What his experience overseas has taught him about being a successful investor in Australian markets
- The relative strength and appeal of commodities, resources, alternatives, financials and energy in the current environment
- The one asset class he would invest in for the next 12 months if he could only choose one
- The sectors he is most bullish on for the 2022 and 2023
It was a buzz. Alex is an experienced and successful investor, a great explainer, and good company. Enjoy
- 01:36 - What have you learned from your international investment experience that works well in Australia?
- 03:50 - The prospect of a US recession and whether to be more aggressive now
- 06:01 - Likely headwinds over the three years
- 07:48 - Should Australian investors rejig their portfolios?
- 09:54 - What are the best or most interesting or promising defensive assets?
- 14: 22 - Why 2022 is a year for alternatives
- 16:14 - Alex's experience of the GFC
- 18:54 - The prospect for commodities, financials, energy resources
- 21:45 - Are tough times more satisfying than easy times/
- 23:45 - A Frenchman's impressions of Australia
Click on the player to watch the interview or read an edited transcript below.
Matt Buchanan: Hi, my guest today is Alex Ventelon, the Head of Research and Investment Strategy for Morgan Stanley Wealth Management.
Alex's remarkable career has taken him from France to Luxembourg to Singapore and latterly, Australia, in senior positions with Credit Suisse and AustralianSuper along the way. Alex is an expert in multi-asset portfolio management, investment strategy, economic research, and quantitative analysis. We're looking forward to learning much from Alex today.
But before we get into the nuts and bolts of asset allocation, Alex, perhaps we could turn back the clock and start at the beginning for you. What was your first real interest in investment?
Alex Ventelon: My first interest in investment was probably first through the lens of macroeconomics. I've always been a generalist, but I thought what was really driving a lot of things, whether it's geopolitics or whether it's the relationship - people - at some point, it's tied with the state of the economic environment.
Of course, all of that is interconnected, but economics is at the heart of our relationship today, that's how we live in a globalised world.
Probably one of the key things that has changed in the world is how macroeconomics is fed into capital markets and the importance of capital markets today. So naturally, my interest went from macroeconomics to capital markets as I also developed an interest into investing myself.
Matt Buchanan: Alex, you've worked around the globe, from your native France, to Luxembourg, and Singapore, before coming to Australia in 2011, I believe. What is it that you could say you would've learned overseas that you can deploy in Australia?
Alex Ventelon: Well, obviously, quite a lot, it was an interesting journey. Coming out of Europe, I think in Europe, as you know, we've probably had a much more sluggish growth than in Australia for decades now for a number of reasons, but I was really coming out of an environment where growth was slower and the interest rate was structurally lower.
The largest market, in terms of capital market in Europe, is the bond market. So, we are, by nature, relatively defensive investors, very cautious. It's about stability, and capital preservation, which I think is very good because then the focus is really around risk management and capital preservation.
I think it's a good asset to have as an investor. And then I moved to Singapore for a short experience there, but also it was very, very interesting to me, because Singapore, of course, is a lot, fast-moving, very much with exposure to the Southeast Asian economy and also to the Chinese economy.
Investors there are a lot more driven towards returns, a lot more transaction-based. Here, I think I developed more skills around trade idea generation, being more active as an investor.
So, coming into Australia, I thought it was an interesting mix of skills for me, having both risk management coaches background, but also trade idea generation. It was a good mix to have in Australia, because I think that's how Australian investors are in the end. They want returns, but they're also very much looking for strong risk management capability, and I think that's the best you can offer an investor here in Australia.
Is now a time to be a little bit more aggressive with the current environment, with fears of a recession in the US and the markets behaving as they behaved since the turn of the year?
We've been decreasing risk in our portfolios since October of last year here in Australia for multi-asset investors. As a house, we've had to view that this year would be a transition year as early as November of last year. So, we are still in this environment where things are volatile, very fluid, one would say, but the recession is not our base scenario right now, especially in the US.
Talking about the US more specifically, we think growth is going to slow down, probably half the base this year of what we had last year, both at the global GDP level and the US GDP level.
Of course, markets need to reflect that, they also need to reflect the fact that interest rates are going higher, bond yields are going higher, so the risk premium on most risk assets are now compressed. So, just going back to the economic side of things, a lot of the things that really created that bump in global growth last year are waning this year.
A lot of the fiscal stimulus is rolling over, and the monetary policy has gone 180 degree from extremely stimulatory to a contractionary this year. So, that will, again, generate this halving of GDP, but to tip into a recession, we will need to see a worsening of the situation in Russia-Ukraine, for instance, and we will need to see a much weaker consumer overall, which is not what we expect. So, we only see the probability of a recession in the US at about 25% for the next 12 months.
So, we have exogenous factors like the Ukraine situation affecting inflation. What other headwinds or other factors should investors be considering in the mix when they look over the next two to three years?
All right, let's take it back a notch. I think we've had a lot of stimulus coming out of the COVID crisis, some say too much. I might explain the phenomenal recovery that we had, which is something we called quite early on, we call that the V-shaped recovery, this is exactly what we had.
And then right after we called the V-shaped recovery, a few months later, we started going with the hypothesis that this would be a short-lived cycle, this post-COVID cycle. Right now, this is probably what we are witnessing, and that cycle should be a bit shorter.
Now, is this cycle going to end with a proper recession? We don't know yet, but again, we are in a situation where the global economy is muddling through, but there are a lot of risks out there.
Probably the main risk, outside of the crisis in Ukraine, is the hard lending scenario, meaning the central banks around the world will tighten too much, and will destroy demand trying to solve issues that are mostly supply driven.
That's really a situation that would tip us into recession and which would then see asset prices, especially the risk assets, going down a lot further. So, I think that's probably the key risk we need to monitor.
It may be difficult to answer this question because it calls for something simple, but there's so much complexity. Should Australian investors be thinking about rejigging their portfolios now, or is it more of a waiting game?
Well, again, right now, we think it's a challenging environment. We think this year is going to be challenging for most of it. We've been very upfront with our clients and our research, in the sense that yes, there's going to be volatility, probably things will get a bit worse before they get better.
But again, going back to inflation in Australia, we're expecting to have inflation of around 4.5% for this year, between 2 and 3% next year, versus a cash rate that should average about 1% this year and around 2% next year.
It means that in real terms, one suggested for inflation, if you stay in cash, you will lose money, and inflation will erode the value of your savings. Now, if you compare the yield you can get on an investment-grade or high-quality corporate bond in the US around 4.5%, it's matching inflation. That's also a dividend yield that you're getting on Australian equities at 4.6% right now without franking benefits.
So really, the view is that right now, investors should be invested. It's not a time to be in cash in one's portfolio, it's a time to be invested, but diversifying the risk across a number of asset class, and favouring defensive exposure versus high risk exposure. So, it's the classic late-cycle playbook. Be invested but defensive.
Let's see what happens with the GDP growth for the next six months or so, and then we will reassess and make the decisions towards lightning up versus buying back.
You have great expertise in asset allocation, and we've been discussing rejigging portfolios. What I'm sure our viewers would like to know, what I'd really, really like to know are, what are the best or most interesting or promising defensive assets I should be looking at in the next while?
All right. Well, it's a very good and very broad question. So, across the spectrum of asset allocation, which gives us plenty of range, what we can find is that right now, again, Australia in the sweet spot.
Growth is going to be stronger here than in most developed markets, beating the G10 this year and the next, we're expecting. We are in a more solid fiscal position. We are also will have a central bank that will be tightening less than in the US.
We expect the RBA cash rate to top at 2.25% versus the US Fed at 3.12%. We've also experienced a bit of the weakening of the currency lately, we're expecting more to come, so that's a boost as well for exports and offshore earners in Australia. We have a number of tailwinds. It's also a more defensive market.
Dividends are on the rise, and we should see more out of the material sector, in particular, this year. So, our preferred market from an equity standpoint for its defensive quality and yielding feature is certainly Australia. So, we are happy to run with the domestic bias for a while longer.
And then in terms of offshore markets, it's more a matter of sectors than regions, I would say.
The US healthcare or the global healthcare sector, we like quite a lot.
It's biased towards pharma, it's probably more able to cope with a higher yield, has usually a stronger pricing power than most other sectors, and yielding also between 3 and 4% on average, so a pretty good place to be.
We expect utilities and infrastructure for a lot of them, or inflation and/or GDP-linked assets, which show some very interesting defensive characteristics. Another way to look at it is through what we call the minimum volatility factor or investment style.
This sort of investment style is probably the most suited to the current environment, we believe, and so that's a good defensive exposure to having one's portfolio.
I would say this could be complemented right now by a mix of government bonds, which we were clearly not so enthused about a few months ago.
But given we had the worst quarter in government bonds in almost 30 years in the US, now they look a lot more investible, both in Australia and in the US, we think that the market pricing or the expectations around how many hikes would be pushed by the central banks has gone too far, and it's come back a notch.
Obviously, we were a bit ahead of that move and we were quite lucky on that front, but we still think it's a good asset class to rebuild into one's portfolio because it's providing you with diversification and a nice yield. The Australian 10-year yield is above 3% right now, so it's quite decent. It will still be a bit volatile, but the diversification benefits are back.
On top of that, corporate bonds, we don't think the corporate sector here in Australia is at much risk in terms of default for what we call the investment-grade part. It's very important, the safest part of the credit spectrum.
Lastly, I would say, alternatives. It's a year for alternatives, but not all alternatives. Of course, the ones we prefer are the ones that are able to take what we call non-directional bets, to not be exposed to the full direction of one's market. I think it's a good asset to have in one's portfolio right now.
Here's a question without notice, you mentioned the GFC earlier: What was your experience with that? What did you learn from it? Was it like a war that everybody went to and recovered from?
Well, I would say for me, it was a very strange start into financial markets, because when I did start, my very first experience was back in '06, and I remember those days being a junior portfolio manager rocking up to my desk every day, lightening up my screen, and putting on Bloomberg.
I would see everything in the green nearly every day, until we had that first in March '07, when we started hearing about those things named subprime, which by then, a lot of people, even among the professional investors, didn't know too much about.
And then we had this absolute meltdown of markets, with days where we had -7%, things like that on major industries. We really thought this was the end of it. It taught me so many things, first of which probably was that we got to be careful when we see bubbles arising and not be too dismissive, because there were many, many warning signs. In hindsight, there's always many warning signs. You've got to respect the cycle.
In a piece you wrote for Livewire not so long ago, you also mentioned commodities, financials, energy, resources. Could you expand a little bit on that for us?
Yes - absolutely. Well, in commodities, I think most of the key markets, especially from an Australian standpoint, are still supply constraints, the demand's strong. Our favourite market is the energy market with oil and the brands, more specifically that we expect to be well-supported throughout the year. There's a supply-demand mismatch, and things are only going to get worse once China is going back to full steam, but if not full steam, on its path to recovery. We are seeing the number of COVID cases really falling dramatically in China, and every day we're getting closer.
Is China get going to get back to full steam, do you think, soon?
Well, it's been postponed a number of times, but they've announced a number of stimulus measures that they are going to implement. As often, they are specifically aimed at infrastructure building, there's also some relaxation of the rules around property investing, for instance, and all of that should benefit commodities as a whole.
That's what also makes us quite positive on ROR, especially with the peak in the third quarter of this year, and also positive on the brands, so these two markets are probably among the markets that we prefer, which is quite positive for us as Australian investors, so the view hasn't changed there.
In terms of the other markets, I would say that, so materials, energy, we like defensives. Probably less keen on the financials, whether it's from a global standpoint and from an Australian standpoint.
Here in Australia, the rise in the mortgage rates and the very fierce competition among the banks and the non-bank lenders, will make it such that we expect that the demand for mortgage, on the one hand, will fall and the margins will still be under pressure, although they're expected to rise.
Alex Ventelon: So, it's going to be a bit of a more challenging environment, and also, they respond to the growth pulse in the economy, which we also expect to fade. So, I would say from a domestic standpoint, probably this strong view we had on financials done very well, but now we are moving on, and probably a sector like Australian healthcare, for instance, shows more quality right now, in our eyes.
A personal question. For someone in your role, is it almost more exciting to be in a situation like this, where it is challenging and there's so much complexity or is it just better when it's better times?
I don't know. I feel it's always challenging, anyway. I don't feel more stressed this year than I was last year, to be frank with you, because, it's the natural evolution of the market.
As our CIO say, we might have overearned across a number of aspects last year, and we're giving back some this year.
Is the long-term trend growth, GDP-wise, at risk? We don't think so. Is the long-term trend growth of equity markets at risk? We don't think so. So, there are variations, there are also this cycle analyses.
We are quite late in this cycle, return are going to be compressed. Yes, that's fair. But then there will be the next phase, and probably it's going to be a phase where returns are more positive again.
It's about trying to find the right mix of assets to weather the storm, when you're facing the storm, and then be ready to act decisively to capture the upside. That's why I'm saying that this year is no more stressful for me than last year was because last year I was very much focused on making sure that I captured the full left side of that spectrum while it lasts. So, these are the things that probably we need to keep in mind.
Thank you so much for talking to us today. I really enjoyed our conversation. Before we wrap up, I'd like to ask you another personal question. You've been in Australia now for 11 or so years, if not longer, what are your impressions of the place? What do you like about it? Do you have a family? How do you enjoy Australia when you're here?
Well, funnily enough, I came here because I had the opportunity with my firm to be transferred from Europe to various locations, potentially in Asia-Pacific. Once I had the opportunity, the first one that was available in terms of transfer, was Sydney, so I applied for the job and turned out that it was my wife's long life dream of moving here. So, we went to Australia, we knew nothing about Sydney or Melbourne or whatever, we assumed we'd love the place, and it was 11 years ago. I must say, Australians have been so welcoming, especially compared to the French.
Listen, I find people are fantastic, they're very much welcoming, especially with foreigners like me, even though I'm a citizen now, but it's been a great experience living here. Now we have a son, so a little Australian-
Alex Ventelon: ... a three-year-old, and we are loving it, it has everything. I've lived in both Sydney and Melbourne, as well, and I'm very glad that I get to travel to Perth or Brisbane, to various locations in Australia.
So, I'm glad I can experience the full spectrum of what Australia can offer. But certainly the lifestyle, in my opinion of what I know, cannot be beaten, from a professional person living with a family, I think that's the best I could get.
Fantastic. It's pretty staggering, isn't it?
Alex Ventelon: Yes, it is.
All right, Alex, thanks again for joining us. It's been a pleasure to talk to you. Thank you.
Alex Ventelon: Thank you very much. Thank you.
Specialist advice from Morgan Stanley
Morgan Stanley Australia focuses on providing individuals and institutions with specialist strategic advice and then helping implement these strategies through superior investment execution. To learn more, please visit their website.
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Matt Buchanan is Head of Content at Livewire Markets. Matt is an avid investor with many years' experience in journalism and product in senior roles at the Sydney Morning Herald, the ABC and Microsoft, before landing his dream job with the...