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Economics & Markets

Why is the market giving mixed signals?

By Dermot Ryan
Sydney, Australia

Investors might be a bit confused at the moment because asset markets are giving us very mixed signals.

The bond, commodities and equities markets are telling us different things about what we should expect in the future.

It’s important that investors consider robustly positioning their portfolio, so it is resilient across some of these scenarios.

Strong equities

We’ve firstly had at a very big rerating in Aussie equities which are up almost 25 per cent, including dividends, from their December lows.

We are now within a hair of breaking the ASX 200 price record of 6825 (November 2007) and in the US the S&P 500 has just made a fresh record high of 3000 (11 July 2019).

That is suggesting to us, strong returns and a good growth outlook locally, with stimulus working to hold off a property or economic downturn.

At the same time, we have record $A gold prices, driven by the weak $A. A sharp spike in gold prices is normally associated with fearful markets.

Strong bonds

And in the bond markets, we’ve had a strong rally and hit record-low yields that are in many cases negative. A negative bond yield means you are paying the government to return your money in a few years, a very strange proposition and there are over A$15 trillion of bonds valued like this at the moment, which is concerning to us.

Bonds and gold are suggesting risks of global deflation and slower global growth, or even a global recession. This scenario would not be good for a lot of asset classes, notably ‘growthier’ exposures like equities.

Normally equities and bonds/gold tend to be negatively correlated: when one asset class rallies or falls, the other does the reverse. But equity markets are rallying at the same time as gold and bonds are rallying.

Why is that happening? Maybe investors are reacting to the next leg of central bank rate cuts and stimulus or maybe ‘Mr Market’ has lost it and some assets need to be repriced lower.

Defensive posture

So what should investors consider doing amid these mixed signals?

When it comes to equities, and indeed general investing, we think investors should perhaps be a little bit more defensive so that their portfolio can be robust if one of the adverse scenarios eventuate.

Peeling it back, pockets of the Aussie equity markets – growth stocks, and particularly technology stocks – have rallied to valuations over and above what we believe is realistic in terms of future profitability.

We think this rally probably can’t last too much further. A number of companies have already issued downgrades at the back end of the second quarter. We also expect volatility during the upcoming reporting in August.

Cash comfort

In this environment investors could look for opportunities in defensive companies with under-geared balance sheets or resilient business models.

There are defensive opportunities on offer. Over one third of the ASX300 now are net cash: they have more cash than liabilities.

Balance sheet strength and cash give companies strategic flexibility. Most of these net cash companies have strong free cash flow too and can invest organically for growth.

These companies are in a position to better withstand adverse economic conditions.  

Source: Factset, company data and AMP Capital
Source: Factset, company data and AMP Capital
Source: Factset, company data and AMP Capital
Source: Factset, company data and AMP Capital

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Dermot Ryan, Co-Portfolio Manager (Income)
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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.


This article is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.

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