Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 240

Volatility and reflecting on the inflection

Initial selling during a heavy share market fall has nothing to do with valuations, and that is why it is always difficult to judge the extent of any short-term correction. With a bit of space from the immediate ructions of last week, what did it tell us about the long-term position of debt and equity markets?

Finally, a reaction to rising rates

Having watched this sort of thing far more than I’d like, my summary is this: it was an interesting but not unexpected week with a technical adjustment in markets. It was investors finally reacting to the fact that interest rates are adjusting to the reality of stronger economic growth and a US central bank that has begun the process of removing excess liquidity from the system.

Eighteen months ago, I thought that we had turned a corner not yet recognised by the broader market. Interest rates had inflected. Few people thought the same, particularly given the lack of wages growth in the US and the fact that interest rates were still negative in parts of Europe.

Scaling the wall of Fed money

The Federal Reserve monetary base since 1950

In September 2016, I expressed a view in our quarterly report that investors should note how abnormally low rates are (and remain so now) and not to allow the gyrations of the market to hide the fact that the tide may be changing. We thought the inflection point had occurred in July 2016 and there would be a different set of long-term opportunities in future.

Our expectation was that economic growth and earnings would be better than expected and the short-term price action risk would now more likely come from inflation scares and subsequent upward moves in interest rates.

Between then and now, we have invested based on our belief that markets were underestimating how tight labour markets were, with the most common complaint from CEOs in the US being the inability to find workers. Coupled with the passage of Trump’s tax cuts late last year, which in theory will create significant pent up demand, interest rate markets have noticed that the inflection point had already been reached.

Flow into bonds at the expense of equities

However, investors (particularly passive ones) have been still piling into bonds at the expense of equities.

Until recently, the lack of wage growth was still a popular theme. This was looking in the rear-view mirror. Then we saw the strongest year-on-year increase in US wages for some time and market sentiment turned on its head and interest rates appeared to trigger a technical reaction in equity markets.

I suspect it is simply further confirmation that excess liquidity is starting to leave the system, the most high-profile examples being through VIX funds and even Bitcoin. Investment opportunities will now be in those companies that can grow their earnings, as opposed to those that historically benefited from a re-rating on the back of lower interest rates.

Investment opportunities, but with some cash caution

Many forecast valuation multiples seem reasonable. As examples, home builders are trading at less than 10x forecast earnings, banks and alternative asset managers at 10-12x and Pfizer is 11x. Over 50% of our global portfolio is on an average price to earnings (P/E) ratio of approximately 11. Other large sectors and stocks, as monopolistic and high growth businesses like the financial exchanges, Mastercard, Visa and Google range in P/E ratios from 18-24x, which seem reasonable for the nature of their businesses. We believe these types of businesses will give a satisfactory return in a general market environment of lower returns and choppier price action.

With last week’s pullback in the market, we marginally reduced some of our futures hedges, closed out short REIT positions and will, in all likelihood, marginally increase some of our existing positions. This will be done within an overall framework that interest rates have inflected, markets have done well, and an invested position of approximately 85-90% is prudent.

 

Paul Moore is Chief Investment Officer at PM Capital. This article is general information and does not consider the circumstances of any investor.

RELATED ARTICLES

The markets to gain most from US rate cuts

The tortoise wins in investing

Will the RBA cut rates before the Fed?

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

Latest Updates

Investment strategies

Trump's US dollar assault is fuelling CBA's rise

Australian-based investors have been perplexed by the steep rise in CBA's share price But it's becoming clear that US funds are buying into our largest bank as a hedge against potential QE and further falls in the US dollar.

Investment strategies

With markets near record highs, here's what you should do with your portfolio

Markets have weathered geopolitical turmoil, hitting near record highs. Investors face tough decisions on valuations, asset concentration, and strategic portfolio rebalancing for risk control and future returns.

Property

Soaring house prices may be locking people into marriages

Soaring house prices are deepening Australia's cost of living crisis - and possibly distorting marriage decisions. New research links unexpected price changes to whether couples separate or silently struggle together.

Investment strategies

Google is facing 'the innovator's dilemma'

Artificial intelligence is forcing Google to rethink search - and its future. As usage shifts and rivals close in, will it adapt in time, or become a cautionary tale of disrupted disruptors?

Investment strategies

Study supports what many suspected about passive investing

The surge in passive investing doesn’t just mirror the market—it shapes it, often amplifying the rise of the largest firms and creating new risks and opportunities. For investors, understanding these effects is essential.

Property

Should we dump stamp duties for land taxes?

Economists have long flagged the idea of swapping property taxes for land taxes for fairness and equity reasons. This looks at why what seems fairer may not deliver the outcomes that we expect.

Investing

Being human means being a bad investor

Many of the behaviours that have made humans such a successful species also make it difficult for us to be good, long-term investors. The key to better decision making is to understand what makes us human and adapt.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.