Welcome to our monthly market update.

Positioning

Over the month, risk markets have continued their post-Brexit rally, while central banks have been supportive and market valuations have risen. The “X factors” that had been dominating the negative views – bad debts in the Italian and Chinese banking system, terrorism, political issues and the rise of anti-globalisation – have given way to a “fear of missing out” rally. While earnings growth estimates continue to ratchet down, price-to-earnings multiples have expanded to elevated levels.

Equities: We remain neutral in International Equities and moderately underweight in Australian equities. Earnings growth in international markets remains more positive than in Australia. While we are expecting some moderate upgrades to resource stock earnings based on spot commodity prices, we continue to expect spot prices to moderate. Banks (with limited top-line growth) and industrials (which are trading on relatively expensive multiples) should struggle to drive markets higher in the current environment.

Fixed income: Long-term government bond yields were mixed with US yields marginally lower over the month while yields in Europe and Japan were higher. The RBA cut rates in August to 1.50%, the lowest cash rate recorded. Europe and Japan continue to pursue “non-conventional policy” depressing yields. In the US, a stronger run of data has increased the likelihood that the Federal Reserve will tighten before the end of the year. We continue to see little value in fixed income andremain underweight this asset class. That said, we are not expecting a big deterioration in long-end yields over the rest of the year and are content to be modestly underweight.

Property: We remain underweight our benchmarks due to valuations. Property performed well in July driven by the continued search for yield. With bonds likely to remain relatively benign, we expect property prices to remain broadly at these elevated levels over the forecast period but susceptible to the downside.

Alternative assets: With long-run growth forecasts being ratchet down and debt levels in most advanced economies at high levels – the future macroeconomic tailwinds are expected to be more muted than previous recoveries. Traditional asset classes are already expensive, and volatility is expected to remain high, so we continue to support overweight positions in defensive and growth alternative assets.

Currency: Iron prices have seen strong rises so far this year which has resulted in an unexpectedly strong Australian Dollar. Perversely the Australian Dollar rallied on the back of the early August cash rate cut. There are early signs that the Chinese stimulus is starting to unwind, and with iron ore supply still expected to expand over the next six months, we are expecting the currency to moderate towards 70 US cents towards year-end. We continue to recommend being fully unhedged for international equity exposures.