S&P calls for renewed portfolio diversification

Simon Ibbetson

Standard & Poor’s (S&P’s) latest asset allocation report suggests further diversification of investment portfolios is increasingly important, with recent earnings growth outstripping the sustainability of such growth in Western economies.

According to the report, two of the most attractive potential diversification strategies are emerging markets and direct hedging.

It said new opportunities in emerging markets revolve around growing domestic consumer markets, with largely untapped potential among individuals who are just beginning to demand their rights to borrow and spend in much the same way as citizens in Western countries.

The report also suggested that the inherent advantage of direct hedging strategies lies in the strong possibility of true diversification in the short term, despite relinquishing the upside potential of a buoyant market.

Simon Ibbetson, S&P’s director of investment consulting, said: “The impact of rising long-term interest rates will be increasingly expensive property and equity valuations, thus requiring careful but active diversification into emerging markets and direct hedging strategies.”

He also warned about the propensity for investors to become complacent when times are good, explaining that “historically low levels of implied volatility have created a false sense of security, and investors should be aware that volatility can and will increase at some point in the future”.

Other key findings of the report were strong performances of growth assets, led by a 7.2 per cent jump in the listed property trust sector, a rise among global shares and a positive impact in the domestic market as a result of takeover speculation.

It also showed hedge funds continued to provide strong returns, while bond markets fell in line with diminishing hope of interest rate cuts in Australia and overseas.