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10 May: Quarterly rebalance update

On 10 May, The Enhanced Strategic Model Portfolios traded a scheduled quarterly rebalance, with the key objective of effectively managing risk and adapting to changing market conditions. Uwe Helmes, Lead Strategist for Model Portfolios, provides an update on the key takeaways from the rebalance.

Hi, I’m Uwe Helmes - lead strategist for the Model Portfolio Solutions business in Australia.


On the 10th of May we conducted a quarterly rebalance of the Enhanced Strategic Model portfolios and we wanted to share with you some insights and trade rationale for the decisions we made surrounding this rebalance.


Before I discuss the rebalance in greater detail, it’s important to recap some of the recent market developments and key performance drivers.


Equity and bond markets have recorded positive returns since the latest portfolio rebalance in March, despite economic uncertainty and a crisis in the US regional banking sector.


Inflation appears to have peaked in Australia and the US, but it remains too high and well above the target range of 2-3%.


The Reserve Bank of Australia as well as the US Federal Reserve hiked rates again by 0.25% earlier in May.


The RBA has now embarked on its fastest and largest rate hiking cycle on record, while the US Fed is on its fastest hiking cycle since the early 1980s, putting an end to more than a decade of ultra-low interest rates.


Central banks are facing a very tricky trade-off between fighting inflation and potentially pushing the economy into a recession.


The recent failure of two US regional banks and the surge in UK government borrowing costs late last year are examples of cracks that are starting to emerge in the global economy.


At this stage, central banks are responding to financial stability concerns through the provision of liquidity and address inflation concerns through ongoing rate hikes.


On the positive side, corporate earnings are holding up reasonably well, despite the tighter monetary conditions. Most major global companies beat expectations during the latest corporate earnings season. However, earnings growth has slowed in recent quarters and is now marginally negative but far away from recessionary levels.


The investment landscape remains uncertain and fluid, and we believe that it requires a more nimble and flexible approach to portfolio asset allocation.


Taking these market developments into consideration, we’ve used the latest rebalance as an opportunity to make some portfolio changes and reflect our current tactical views.


In aggregate, we lowered the growth/defensive split of the portfolio by reducing the equity exposure and moving more into fixed income assets. This reflects our slightly more cautious view on risk-taking and a desire to improve portfolio resilience.


In particular, we increased the allocation to higher quality bonds – mainly Australian investment grade bonds – while decreasing the allocation to riskier fixed income such as high yield and global credit.


We maintain an overweight position to inflation-linked bonds, as we expect inflation to stay above the RBA’s 2-3% target range for longer.


Within equities, we decreased the allocation to US equities and went further underweight. This change was driven by less favourable valuation type signals and momentum indicators.


We also believe that the turmoil in the US regional banking sector is going to lead to tighter credit conditions in the US, which should act as a headwind for equities.


We maintain a small overweight to Australian and European equities in light of more favourable valuation signals.


We remain cautiously optimistic on Chinese equities despite the recent slowdown in momentum, but we pair this position with a broader underweight to Emerging Markets for balance in the portfolio.



Thanks for watching and please reach out to your BlackRock relationship manager with any questions.