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The three triggers for the recent sell-off in stocks were the rapid rise in US bond yields, a reappraisal of valuations for strongly-performing technology and healthcare stocks and concerns about the impact of geopolitical conflicts on earnings. None of these factors will disappear in a hurry so investors should be prepared for further volatility ahead.

There is more value on offer for selective purchases, but prices are not yet cheap enough to shift away from our neutral exposure to the equities asset class.

Our direct equity portfolios favour competitively-advantaged cash-generative companies providing sustained growth despite the difficult conditions and who possess the ability to pass cost increases on to customers. We are watchful of valuations particularly in technology sectors and are less interested in no-growth high-yielders that will perform poorly as bond yields march higher.

We are underweight fixed income as markets are likely to continue to be surprised by the rise in inflation. Solid US growth and tightening labour market will assist general price rises. The US 10-year bond yield has lifted substantially in the last year and is likely to move higher over the next 12 months. There are also fewer buyers now that central banks led by the US Federal Reserve are winding back asset purchases.

We continue to carry additional cash balances, so we can take advantage of opportunities to invest as they arise.

Moderating China growth has been felt around the world though renewed stimulus efforts should arrest the slide in the short term. Fiscal imbalances remain a concern that must be reckoned with at some stage, likely through a slower growth trajectory over the longer term.

A US recession is a clear risk for stock prices but there is little evidence that this is imminent. Warning signs that often precede downturns are not yet present, such as over-consumption, over-investment including a housing bubble or excessive wages rises.

“As the next bear market eventuates, there will be some excellent opportunities for long-term investors willing to put up with short-term volatility”

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