Commercial property sentiment improved in Q4 but remained weak and below average
Knowing when to reduce the proportion of equities in a portfolio and when to increase exposure to other asset classes like property, cash and bonds, can be part science and part art. Valuations, fundamentals and sentiment all play a role.
Decisions to change asset allocation weightings are not always easy. Knowing when to reduce the proportion of equities in a portfolio and when to increase exposure to other asset classes such as property, cash and bonds, can be part science and part art.
To help with these decisions, it’s useful to consider three factors that apply to asset classes: valuations, fundamentals and sentiment.
Valuations: Are valuations in share, bond and property markets supportive or are prices trading above fair value?
Fundamentals: What are the current fundamentals of the asset class? For example, are corporate earnings growing strongly, are balance sheets in good shape, are credit defaults rising, is inflation under control, how large are rental vacancies?
Sentiment: Is investor sentiment supportive towards the asset class, is it weak or overly exuberant? For example if the proverbial shoe shine boy is handing out stock tips, it’s probably time to get out of the share market
Currently, most asset classes are displaying reasonable fundamentals. Governments are mostly in the process of reducing debt, corporate balance sheets are in good shape, earnings are growing modestly and rents are rising slowly in the property market. Sentiment is also generally good across most asset classes, investors are comfortable buying riskier growth assets and even bonds at zero interest rates, Initial Public Offers (IPOs) and corporate bond issues are being well supported. There is also significant investor demand for commercial property.
The valuation question is less clear cut. On the one hand, valuations appear expensive when compared with history, but reasonable when compared against the backdrop of near zero interest rates. So overall, there are no compelling reasons to change asset allocations this month.
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