High hopes for long-term shares outlook

Long-term investment expectations are at their highest level in almost a decade, according to Zenith Investment Partners.

Short-term challenges do remain, but Damien Hennessy, Zenith’s head of asset allocation, says higher yields, lower valuations and a normalisation of policy settings are setting up the market well.

Last year was the worst in more than a century for a standard 60/40 (shares/ bonds) portfolio, but Hennessy sees plenty of reasons to be optimistic.

“We do expect higher volatility than what we have experienced over the past decade given higher rates and inflation, less supportive liquidity settings and the likelihood of a more volatile business cycle.”

If, however, inflation has peaked and the negative correlation typically exhibited by markets reasserts itself, then portfolios should prove more robust.

Steven Tang, Zenith’s head of consulting, says the return expectations for global equities have also improved, while the diversification benefits of unhedged global equities continue to shine. “Portfolio return assumptions for a 60/40 traditional balanced portfolio are looking better than they have since 2015.”

Tang says higher allocations to global small and mid-caps is warranted for investors with slightly higher-risk portfolios. “These are the asset classes or sub-sectors that have sold off the most over the past 12 months or so, and once the threat of higher inflation and rates and recession risk recede, upside potential will emerge.”

Tang says the Australian market wasn’t impacted as much during 2022, but there were still some headwinds. “Although the structure of the domestic market has proven favourable in a rising inflation and interest rate environment, and we maintain a healthy weighting to Australian equities, there is a point at which interest rates start to act as a headwind.”