During the quarter, global central banks signalled that interest rates had peaked and turned their focus to the possibility of interest rates cuts in 2024. In response, US bond yields fell from almost 5.0% to just below 4.0%, setting the tone for other countries to follow suit. This shift prompted investors to inject additional risk in their portfolios and increase their equity exposure.

Investors brushed aside near-term challenges such as, the developing Middle East conflict, inflation levels above central bank target levels and the potential for an economic recession. Instead, markets anticipated the prospect of a declining interest rate environment, a potential catalyst for global economic growth and adding impetus to corporate earnings as 2024 plays out.

We are being well rewarded in our interest-bearing assets, alleviating the need for additional risk at present. On a risk adjusted basis, both growth assets and interest-bearing assets are offering similar total returns, thereby justifying our defensive positioning with approximately 65%-70% growth assets and is smoothing out our return profile. The Capital Preservation Balanced model yielded a positive return of +4.4% during the quarter.

Anticipating a strengthening “interest rate tailwind” and considering the historical positivity associated with US election years, we foresee an improved market performance in the latter part of 2024. As the year progresses, the combination of these factors may propel markets forward, paving the way for solid portfolio returns. Looking ahead, we remain poised to explore increased exposure to growth assets, aligning with our commitment to optimising outcomes for our clients in the dynamic landscape ahead.

We continue to shape portfolios to optimise outcomes across asset classes within our overall risk parameters. In line with this, we executed the following changes during the quarter:

• Our Investment Committee has reduced property exposure over a period of 18 months. Recently, income yields were being offset by property devaluations. In our view, the near to medium term outlook for the property sector would be a drag on our performance and as a result we sold the remaining property exposure across portfolios.
• We partially switched exposure from the Realm Short Term Income Fund and PM Capital Enhanced Yield Fund to the Metrics Direct Income Fund (currently yielding over 9.0% pa.)
• These moves will yield us a 3% p.a. extra income return, which is significant from our defensive interest-bearing investments.
• We increased international equity weightings from 16.7% to 23.0%, through further investments in GQG Global Equity Fund and Aoris international Fund. Both funds are excellent out-performers and have added value for Lanteri clients in FY2024.
• Following an unwarranted share price correction during 2023, we thought ResMed offered compelling long-term value and added it to portfolios. With expanding operating margins in the next two years, we believe profits and share price growth will exceed the market.
• In Australia, we introduced the low-cost Vanguard High Yield ETF for a diversified company exposure supported by high dividends and franking credits. In the past 5 years this investment has produced after tax returns of 12.72% p.a. for super funds.
• We have also been researching the Chemist Warehouse/Sigma proposed merger with a view to potentially taking a position at an attractive price in the coming quarter. This may represent a unique growth story over the long term.

After a solid start to the quarter, markets gradually drifted lower toward the end of the September as 10-year bond yields in Australia and the US continued on an upward trajectory. Investors began to re-assess the valuation of equities and contemplated the heightened likelihood of a modest economic downturn in both Australia and overseas in 2024. 

Oil prices rose 20% during the quarter and the outbreak of the Israel-Palestine conflict has added near-term uncertainty prompting investors to seek temporary safe havens such as gold and the US dollar. Furthermore, Inflation has persisted above central bank target levels, indicating the possibility of prolonged elevated interest rates. 

In the past year we strategically positioned portfolios to take advantage of rising interest rates. When we look at returns over a longer period, Balanced portfolios earned +10.3% in the year to September 2023, reaffirming that it is always important to look at returns from a longer-term perspective.  

Markets are becoming increasingly “data centric” a trend which may provide temporary shifts in expectations and create “pockets of weakness”, which we may be able to exploit during the coming year to add value. 

We have ensured our interest-bearing investments primarily include “short duration” assets, which has allowed us to benefit from the rising interest rate environment and has resulted in attractive yields. Currently, the Realm Short Term Income Fund and PM Capital Enhanced Yield Fund are providing us with an approximate 6.0% per annum return, whilst the Metrics Direct Income Fund is generating an 8.5% per annum return. As such, this asset class is offering a return we have not witnessed in several years. 

The standout performer in portfolios has been the GQG Global Equity Fund, largely due to its substantial allocations in Technology, Healthcare and Energy Sectors. Impressively the fund has already gained 8.8% this financial year, a stark contrast to the -2.7% return of the MSCI World Index. This remarkable outperformance over such a brief timeframe has led our Investment Committee to approve further investment in this fund during periods of market weakness. 

Whilst it is possible that economies may cool sufficiently to allow central banks to start lowering rates and prevent a recession, historical patterns demonstrate that interest rate rises usually overshoot and lead to recessions. The sharp global monetary tightening may have a lagged effect thereby impacting global economies in the months ahead. Under the current circumstances, the probability of a mild recession in 2024 is rising.   

 Whilst Australian economic growth is decelerating, the immigration fuelled population growth in the next 12 -18 months (extra 2% of the population), should provide a healthy economic buffer. There are indications that the Reserve Bank is nearing the end of its interest rate tightening cycle. However, with inflation at 5.2%, an RBA interest rate cut may be a long way off. 

 The UK is stagnating, and several Eurozone countries are flirting with recession. After a strong performance earlier in 2023, share markets in the region are now flatlining weighed down by aggressive central bank monetary policy tightening. 

 China is not providing the demand offset to a potential global slowdown we were anticipating as it struggles to regain momentum post Covid. Consumer confidence, demand and spending are sluggish, whilst debt and property market problems continue. Stronger policy responses are needed to re-establish its growth path.  

 Consensus expectations anticipate a rebound in corporate earnings next year and interest-rate markets are pricing in the potential for moderate central bank easing in a range of countries in 2024.  

With central banks having raised interest rates over the past 18 months, the most important question remains, can they now engineer a soft landing?  

 In our view, we feel it is prudent to maintain a capital preservation strategy with growth assets in the 65%-70% range and only increase exposure when the risk/return parameters are in our favour.