Things look positive, but the biggest risk is complacency

Markets have continued to be buoyed by strong performance and despite continuing concerns regarding inflation, the markets had some relief as bond yields pulled back over the quarter. Key Central banks have taken the view that much of the rise in CPIs is attributed to supply/demand imbalances caused by Covid, these imbalances will diminish and alleviate some of the current inflationary pressures. 

Policy setting also remains conducive to equity markets, with interest rates remaining low as inflation subsides. In addition to supportive monetary policy, fiscal support also remains a continuing theme. Economic indicators such as employment figures, PMIs and consumer confidence all suggest that the economic recovery in well on track, with some indicators exceeding pre Covid levels.

Despite these positives, risks remain – one of the biggest being complacency. While we believe that risk assets continue to offer a suitable return relative to bonds and cash, the increasing divergence in asset and security returns suggests not all boats will float equally. Some of our indicators suggest that the threat of a ‘tail risk’ event is on the rise. Policy error, geopolitical tensions or the path of the pandemic taking an unexpected turn are all plausible. 

(Source: Lonsec Research Pty Ltd, August 2021 Newsletter)

Therefore, defensive assets still play a role in protecting portfolios despite their lower returns. We continue to review client portfolios to ensure they are well diversified and appropriately balanced. Please contact Prudentia Financial Planning on (02) 9416-0606 or email sofie@pfplan.com.au if you have any questions.

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