Investment portfolios should be more weighted towards quality companies to help weather current market uncertainty, according to Zenith Investment Partners head of portfolio solutions Steven Tang.

Mr Tang says a higher weighting to quality companies, that have better earnings potential and lower debt, is important in building robust portfolios in the current climate.

“While their valuations might look a bit more expensive, they are still reasonably priced, and they aren’t at the high prices we saw in 2021.”

Mr Tang says investors should also look to asset classes where recession risks have been better priced in.

“Small caps, particularly global small caps, haven’t really had a good run for most of this year, especially when compared to their large cap counterparts, but we believe they now present a good opportunity to add value.”

Meanwhile, Mr Tang says bonds are looking more attractive and says Zenith is incrementally allocating more bonds to its portfolios.

“Bonds are beginning to reflect fair value and are providing decent investment returns of around four-to-five per cent.

“If we enter a recessionary environment, assuming inflation comes down and central banks have the capacity to cut rates, bonds will be very beneficial to portfolios.”

As for sectors that investors should underweight, Mr Tang points to North American companies, more specifically the mega cap technology companies.

“The ‘magnificent seven’ tech stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – have been driving most of the returns in the US. For this reason, the decisions to underweight both North America and technology go hand in hand.”

Zenith head of allocation, Damien Hennessy, says returns from infrastructure and REITs have been hit hardest from the central banks' recent ‘higher for longer’ approach to tame inflation.

“In the first half of 2023, global markets were ignoring higher interest rates and were more focused on improved cash flows and a global economy that was performing better than expected,” Mr Hennessy says.

“But over the past few months, the situation has changed as the market has now turned its attention to the risks the higher-for-longer interest rates and higher real yields present.”

Even as central banks keep interest rates higher for longer, Mr Hennessy notes that globally inflation has been declining much faster than expected over the past six months.

“UK inflation has gone down from a high of 11 per cent to 6.5 per cent, while US inflation has declined even further to 3.7 per cent. In Australia, it remains at around 5.5 per cent, down from its 30-year high of 7.8 per cent.

“But more importantly, if you look at underlying inflation, those numbers are annualising at a rate of slightly under 3 per cent. It’s good progress and certainly one that the central banks would be very happy with.

“Economies have performed stronger than expected up until now, but higher rates will eventually have an impact and economies should slow in 2024. If you consider that bond yields are around their peak, as long as the economy is not sliding into recession, then those assets that have been priced for even higher bond yields start to look more attractive.”