David Sokulsky
Crestone Wealth Management’s Chief Investment Officer, David Sokulsky, says investors have profited greatly during the recent bull market, but now may be the time to become more cautious due to equity valuations and concerns that markets may correct around calendar year-end.
Crestone Wealth Management (Crestone) represents in excess of $14 Billion of investor assets under management in Australia.
“When you consider the current global context, economic growth and earnings are positive, but equity values are high. Crestone is relatively neutral at present, but cautious against taking on extra equity risk. As a result, we are recommending our clients hold a little bit extra in cash.
“We are also underweight fixed interest because we think that interest rates will rise over the coming year,” said Mr Sokulsky.
Mr Sokulsky spoke at the Crestone Investment Symposium, attended by Crestone’s clients.
The Symposium also heard from Northern Trust Chief Economist Carl Tannenbaum, UBS Managing Director and Chief Economist for Australasia Scott Haslem, Commonwealth Bank Chief Currency Strategist Richard Grace and Credit Suisse Australian Equity Strategist Hasan Tevfik.
“Crestone is recommending that clients remain invested in the markets and take a more neutral stance, importantly Europe remains attractive.”
While Crestone is recommending clients take a neutral stance on US equities given valuation and policy uncertainty, the firm is recommending an overweight position on European equities due to an improved macro outlook, relatively attractive valuations and an undervalued Euro currency.
“We think the best opportunities for investors lie in markets where economic fundamentals are strong and where earnings are expected to grow, but at realistic levels. Europe has been in an earnings recession for more than five years, but the latest reporting season showed the best earnings growth in many years,” said Mr Sokulsky.
Crestone is also cautious on Australian equities given a number of macro headwinds for the banks and retail sectors in particular.
“Australian equities are somewhat fully-priced and the banks are facing a number of major headwinds, which are seeing their earnings growth stagnate. They could also face further issues if the housing market slows. The retail sector is also vulnerable with international competitors such as Amazon increasing their domestic presence and consumers become stressed as debt maintenance becomes an issue.
“Australia is also highly dependant on ongoing Chinese economic strength, which looks like it’s waning given recent data.” Mr Sokulsky said.
Domestic Equities: 2018 pullback?
Going into 2018, Crestone is cautious on the outlook for equity markets given the bull market has run for many years and could pull back due to a confluence of events.
“By the end of the year, we are likely to see two major central banks, the US Federal Reserve and the European Central Bank, effectively tightening monetary policy at the same time. This would provide a new phenomenon and may negatively impact risk assets.
“Additionally, if China’s growth slows down following the National Congress of the Communist Party and the domestic housing market corrects, then equity values would come under pressure,” he said.
Crestone is therefore recommending clients take a more cautious approach to equities and move to an overweight cash position.
“While we believe that now is a time to be prudent and increase cash holdings, we don’t advocate large allocations to cash. As nobody knows what the future holds, it’s best to adhere to a long-term strategic asset allocation,” said Mr Sokulsky.