How to invest in a market full of confusing signals

For a show called Signal or Noise, market pricing of late has been full of confusing and contradicting signals. 

On one hand, equity markets in Australia and the US pulled back from recent highs. The ASX 200 is tracking at six-month lows while the NASDAQ is off by more than 6% in the last 30 days alone. The US 10-year yield, widely considered the global benchmark for asset valuations, is up 50 basis points in just one month. BCA Research has described the savage sell-off in bonds as indicative of the "start of a financial accident". 

Crude oil prices briefly flirted with levels not seen since July 2022. And the US Dollar was once again the safe haven of choice as investors took profits on a gold price that was trading near all-time highs. 

And the most remarkable part of all this? There has been no RBA rate hike for four months (and counting, as of writing).

So is this a healthy correction or what the start of a much larger unwind looks like? And if there has been no rate hike for a few months, is this what unprecedented monetary policy really looks like?

To separate what signals are left amongst all the noise, Livewire's Hans Lee and AMP's Diana Mousina are joined by two of Australia's brightest investing minds:

• Alexandre Ventelon of Morgan Stanley Wealth Management, and

• Anthony Golowenko of MLC Asset Management

Note: This episode was taped on Wednesday 4 October 2023 and first published for Livewire Markets. You can watch the show, listen to the podcast, or read our edited summary below.

EDITED SUMMARY

We began the show with a series of quotes from well-known investors. The quotes pertain to where they are finding opportunity (or concern) in this market. Most of the quotes can be found in this piece by Livewire Managing Editor Chris Conway.

We then asked our panel to nominate the investor they most closely align with.

Anthony nominated a combination of Citadel's Ken Griffin and GMO's Jeremy Grantham. He agrees that the equity market rally is in the last stages and thinks that investors are already in those quality names. But he argues the utopia environment for equities is now stepping aside for a boom period in fixed-income assets.

Diana nominated a little bit of everyone, but she did feel more sympathy for the view of Mike Wilson from Morgan Stanley. Given no one knows when the recession is really coming, you'll need to own equities through until that call is made. She agrees less so with Ray Dalio, arguing a bond fetching 4.5-5% yield is "attractive". 

Alex, being a Morgan Stanley employee, naturally also supports Mike Wilson's view. But he also empathises with Griffin and Grantham's views. With interest rates this high and activity slowing down, the current market reflects "a classic textbook late-cycle environment". 

Topic 1: Arm and Instacart IPOs

Alex - NOISE: While the surge in interest for the Arm and Instacart IPOs is healthy for capital markets, it's only a signal for how investors used to feel about the market. It's not a helpful cue for taking on more risk in the coming months. 

Anthony - NOISE: The Magnificent Seven are magnificent for a reason. Afterpay was a one-in-a-thousand occurrence which was in the right place at the right time. And ultimately, the environment has changed.

Topic 2: Will bonds and the Australian dollar fall further?

Diana - NOISE (A$)/SIGNAL (Bonds): In the short term, the moves for the Australian dollar are heading down (especially if the Reserve Bank cuts rates earlier than many of its peers). But you also don't want to be too pessimistic on China, hence her long-term NOISE call. As for the bond market, the US could still move into shutdown and there are too many unknowns for yields to move down in the short term. 

Alex - SIGNAL (A$)/NOISE (Bonds): The US Dollar is the world's preferred risk aversion trade, and as a result, the Australian dollar has become more of a "victim" than a beneficiary of the Chinese reopening. But a lower Australian dollar is not a bad thing! (For why, watch the video). In bonds, Alex believes yields are due to come down at some point. Morgan Stanley were positive on bonds from 4% levels (they are now at nearly 5%). 

Anthony - SIGNAL (Bonds): To say that the sell-off in bonds won't continue is "brave". He agrees with Alex in that the entry point is getting much more attractive. While Anthony did not give us a definitive call on the Australian dollar, he did say that the team is looking to hedge some of its global equities exposure. 

Topic 3: Cash funds receiving US$1.5 trillion in inflows so far in 2023

Alex - SIGNAL: The statistic is an "interesting" signal which reinforces why the team is positioned cautiously. 

Anthony - NOISE: Cash positioning for many MLC funds is actually at near-platform minimum levels. They have spent a lot of their cash recently into fixed income and high-quality corporate credit products. 

Diana - NOISE: Considering there is no context in this statistic around the kinds of inflows into equities, bonds, or other products, it's not a very useful number.

The Charts to Watch

Diana's Chart: Seasonal patterns for equities

Alexandre's Chart: Bond prices vs. oil prices

Anthony's Chart: Is this just a "more normal" environment?