Peter Keenan: Investors need to check strategies

Australia is still facing the tough process of adjusting to the end of the commodity super-cycle and an austere Federal budget. Photo / Thinkstock

We recently passed the halfway mark for 2014, and the global bull market in equities has continued its seemingly relentless advance, undaunted by geopolitical concerns (Ukraine, Iraq/Syria), oil price risks, the accumulated debt burdens of the global financial crisis, or the problems ahead from central banks exiting quantitative easing policies.

The pricing of global equity markets has climbed back to near the levels seen before the onset of the global financial crisis, in the US case slightly above, and for New Zealand a significant margin above, even allowing for compositional changes in our market.

Likewise global bond markets are aggressively priced, and the margin paid for increased credit risk is very thin indeed.

There are not many markets or asset classes you could plausibly claim are cheap anymore.

But for now, economic growth and very low interest rates trump most concerns about valuation and risk. So long as growth expectations are broadly met, asset market pricing is likely to remain elevated.

A crucial point for equity market valuation is that the entire structure of global interest rates is substantially lower than in 2007, and likely to remain low for at least several years yet. So the pressure on investors to reduce cash and short-term bond exposure in favour of various riskier assets will be unrelenting.

What's an investor to do?

A key factor for equity markets will be whether earnings trends turn out to be broadly in line with now more positive expectations - in short, whether the global economy continues to recover.

Suffice to say that for the global economy, expectations are for at least as fast a growth in 2014 as in 2013, with a likely acceleration into 2015. As always, there are plenty of risks that might unhinge these expectations, but also upside if growth becomes firmly established.

In our small patch of the world, the economy is growing strongly and although the momentum of growth is likely to slow, a continued expansion seems assured, while Australia is still facing the tough process of adjusting to the end of the commodity super-cycle and an austere Federal budget.

So where to allocate capital?

There always comes a time when the best strategy is to increase cash allocations and wait. But equally there are risks to be endlessly jumping at shadows, to overreact to market noise.

We have seen that through the steady advance in equities over the past five years, with nervous jolting corrections along the way, but ultimately a sustained bull market advance from the 2009 lows.

Those with a low tolerance for risk, and less able to cope with corrections, would be wise to adopt a more cautious investment stance. This equity bull market is ageing.

Most importantly, after a strong advance, investors should be rebalancing equity portfolios - to be increasing global exposure while the dollar is at near record highs; to be lifting exposure to markets that are not priced too aggressively, and which have a lot of potential upside; to be reducing exposure to other markets or sectors.

In short, investment portfolios need occasional maintenance. Have a chat to your investment adviser.

Peter Keenan is director of wealth management strategy at First NZ Capital.