Goldilocks' equity market - the beginning of the end?

Overnight the S&P500 closed at 2,703 - and after the recent volatility, posting a 52 week high of 2,872 and a 52 week low of 2,322 for a range of 550 points, and a rise over one year at one point of 24%.

Even though there's been some volatility over the past 3 weeks, the broader US market is less than 6% off its all-time highs, and is still much closer to its recent highs than lows. Volatility, which had been dragging along at less than 10% for much of last year, has doubled to around 18% after spiking to over 40% earlier in the month.

US company earnings and profitability have been underpinned by super low interest rates, low inflation, and low wages growth, (albeit that low wages growth is not that great for consumer spending or confidence) which we recently heard described as a "Goldilocks" environment - not too hot, and not too cold.

So the stronger economy is good for corporate health and earnings, which in turn is good for the economy. So what's the problem? The high equity multiples and valuations might be justifiable based on the above fundamentals, but higher bond yields are not good for equity prices if the result is a shift out of equities.

The US economy will continue to improve because the above "lows" are not going to reverse overnight even if they're on the move upwards. Goldilocks is still happy! But careful of bond rates. The US equity market is yielding dividends circa 2.4% - 10 year bonds are now yielding 2.9% and heading over 3% sooner rather than later.

The question is when? Next week sees Jerome Powell's first real outing as Fed chair - and markets will be watching that closely, even if another 3 rate rises are already expected before the end of the year. However, watch the bond market more closely. It is not that the US economy is not improving. Markets are driven by supply and demand, and if overall demand (asset allocation) is shifting from equities to bonds, maybe this signals the begining of the end of the Goldilocks era for equities?

On the local front one of Australia's most highly respected investors and fund managers, Platinum's Kerr Neilson, announced his intention to step down in June as MD and from day to day portfolio management duties. While some observers may fear "key person risks" may come into play given he has run the shop since inception in 1994, Hedge Clippings is not amongst them, partly as he'll remain a director and major shareholder.

Neilson has not only been a major contributor to the actively managed and absolute return sector, but he has created a business with $27 billion in FUM, and in doing so a culture and process which over the past 15 years has helped build Australia's global fund's management reputation. Modest, and lacking the ego often found elsewhere in the sector, we doubt much will change in style at Platinum as neither the culture, process nor people will change much at all. If that view is correct, neither will performance.

BENNELONG TWENTY20 AUSTRALIAN EQUITIES FUND

Attached is our most recently updated Fund Review on the Bennelong Twenty20 Australian Equities Fund.

• The Bennelong Twenty20 Australian Equities Fund invests in ASX listed stocks, combining an indexed position in the Top 20 stocks with an actively managed portfolio of stocks outside the Top 20. Construction of the ex-top 20 portfolio is fundamental, bottom-up, core investment style, biased to quality stocks, with a structured risk management approach.

• Mark East, the Fund's Chief Investment Officer, and Keith Kwang, Director of Quantitative Research have over 50 years combined market experience. Bennelong Funds Management (BFM) provides the investment manager, Bennelong Australian Equity Partners (BAEP) with infrastructure, operational, compliance and distribution services.

For further details on the Fund, please do not hesitate to contact us.

Australian Fund Monitors

ATTACHED FILESAFM Fund Review - January 2018 (pdf format)

BENNELONG LONG SHORT EQUITY FUND

Attached is our most recently updated Fund Review on the Bennelong Long Short Equity Fund.

• The Fund is a research driven, market and sector neutral, "pairs" trading strategy investing primarily in large large-caps from the ASX/S&P100 Index, with over fourteen-year track record and annualised returns of 16.51% p.a.

• The consistent returns across the investment history indicate the Fund's ability to provide positive returns in volatile and negative markets and significantly outperform the broader market. The Fund's Sharpe Ratio and Sortino Ratio are 1.00 and 1.66 respectively.

For further details on the Fund, please do not hesitate to contact us.

Australian Fund Monitors

ATTACHED FILESAFM Fund Review - January 2018 (pdf format)