Asset Allocation: Fiscal Constraints

By Tony Brennan, Chief Investment Strategist

ith the good progress in reducing inflation and some lowering of interest rates across
countries, the cooling in economic activity over the past couple of years may indeed now
be running its course, at least in the US and, to a degree, Australia, particularly with
further fiscal stimulus in prospect in the coming year. Although the fiscal initiatives that
are in store are not fully clear in either country, there seems the likelihood of growth
picking up again, though with that, also potentially higher interest rates than otherwise,
and possibly inflation still above targets.

For equity markets, the success in reducing inflation with relatively soft landings has
buoyed returns over the past 12 months and renewed growth could be positive, but
higher bond yields and inflation could also constrain further gains, and with equity
valuations high, the greater risk to us still seems to be a phase of more subdued
returns. Hence, given the potential for less decline in interest rates, we are advocating
a move back to benchmark weighting in fixed income, from overweight, while remaining
moderately underweight equities, and suggesting now being moderately overweight
cash, in the face of potentially somewhat tougher markets.

Contact your CG Adviser for a full copy of the report.