Key Points: 

  • The prospect of Fed tapering should not be feared by risk assets, although asset allocators should be prepared for increased volatility. We continue to run a modest overweight to risk assets, with a preference for Aussie equities over the US and Europe. Japan and EM are our least preferred equity market exposure.
  • In this note, we take a look at how the two key risk asset markets for Australian investors (the ASX 200 and S&P 500) traded during the 2013 taper tantrum period to see if there are any lessons to be learnt. In 2013, government bonds sold off aggressively after intentions were made clear by then Fed Chair Bernanke. However, by the time tapering began, the US and Australian bond rallied back to around pre-announcement levels some 12 months later.
  • The bond market has rallied strongly this year, as it did in 2013 in the months prior to the Fed’s announcement. We think there is a good chance of de ja vu and that markets get complacent and wrong-footed again.
  • Risk assets rode out the aggressive increase in yields relatively smoothly in 2013, although there were corrections along the way. Investors should see corrections as opportunities to increase risk exposure. The ASX 200 has more attractive valuation now relative to bonds than it had in 2013, but US valuation is significantly more stretched on the same metric. This raises the risk of a larger correction in the US than Australia this time around.
  • The earnings cycle was significantly more mature in 2013 than it is now. Consensus 12-month forward EPS growth estimates are now 20% in the US vs 10% in 2013 reflecting the relatively short period since the COVID recession. Consensus ASX 200 EPS growth is currently 15% vs 10% in 2013. In our recent asset allocation update, we argued that there is upside risk to consensus EPS growth in Australia and downside risk to US estimates. Furthermore, we see earnings growth and not multiple expansion as the engine driving returns at this stage of the cycle.
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