September, 2023
The Bloomberg MSCI Australia SRI/ESG-Weighted A$100M Index (the “Index”) returned -1.52% in September. Supranational-Sovereigns (-0.52%) was the best performing sub-component, followed by Credit (-0.54%), Semi-Governments (-1.50%) and Treasuries (-1.88%).
MSCI has downgraded the ESG score of Vodafone Group PLC from ‘AA’ to ‘A’. This comes on the back of potential labour management challenges and weakness in data security initiatives.
Vodafone announced plans to cut 11,000 jobs (~10.5% of FY 2023 workforce) over the next three years and while it offers severance pay and outplacement support, such events may impact employee morale and heighten challenges of managing a global and relatively large workforce of over 100,00 employees as of FY 2023. Additionally, the downgrade reflects MSCI’s latest assessment of its data privacy policy, which appears to lack groupwide applicability. Australian 2-year bond yields increased 0.29% over the month to 4.08%, and 10-year yields rose 0.46% to 4.49%.
RBA Governor Lowe’s final board meeting came and went in a relatively non-eventful manner with the Board holding the cash rate target steady at 4.10% along with minimal alterations to the statement being made. This was widely expected with 33 of 34 economists in the Bloomberg survey tipping no change. While the board did consider the case for raising rates, it appears for the time being the RBA believes the hikes delivered are sufficient and the economy is on track to lower inflation. The minutes noted that “some further tightening in policy may be required should inflation prove more persistent than expected”, maintaining their tightening bias. As it stands, the RBA are now data dependent and the hurdle for a November rate hike remains high, yet markets have moved slightly closer, pricing in a ~33% chance.
In Australia data continues to surprise on the upside as 64,900 new jobs were created, significantly more than the forecast of 25,000. The unemployment rate remained unchanged at 3.7% as the participation rate increased by 0.3% to 67.0%. GDP for Q2 saw an increase of 0.4%, which was in line with market expectations and saw GDP y/y deliver 2.1% of growth, 0.3% higher than expected. The Melbourne-Institute inflation gauge rose 0.2% over August, down from +0.9% the prior month. The ABS’s monthly CPI for August was in line with expectations at 5.2%. The NAB business survey saw confidence rise 1 point to 2, while business conditions were up 2 points to 13. Consumer confidence fell slightly, with the Westpac survey moving 1.5% lower to 79.7. Private sector credit for August rose by 0.4%, which was 0.1% higher than expected and saw private sector credit y/y come in at 5.1%.
In the U.S., 2-year treasury yields increased by 0.18% at 5.04% while the 10-year yield rose 0.46% to 4.57%. As expected, the FOMC left the Feds Fund rate at a target range of 5.25% to 5.50% with the updated Summary of Economic Predictions continuing to show one more rate hike in 2023. However, policymakers surprised markets with an outlook for rates in 2024 that was notably higher than expected, as Jerome Powell noted the Fed will continue to keep rates elevated until inflation moves more convincingly toward 2.0%. The Fed’s new set of projections reduced the number of potential rate cuts in 2024, from 1.0% to 0.50% of cuts next year – implying that the elevated interest-rate environment may last longer than expected. The market was quick to react to this more hawkish messaging from the Fed with Treasury yields moving sharply higher, as both the 2-year and 10-year yields shifted to new highs for the cycle.
U.S. economic data also continues to be better than expected for the most part. Non-farm payrolls saw 187,000 new jobs created; this was 17,000 more than expected. Despite the outperformance in new jobs the unemployment rate increased 0.3% to 3.8% with the participation rate rising 0.2% to 62.8%. Headline CPI for August rose 0.6%, in line with market consensus and saw CPI y/y increase 0.5% to 3.7%. Trimmed mean CPI y/y growth rate slowed from 4.7% to 4.3% as the m/m increase was 0.3%. Final GDP for Q2 rose by 2.1%, 0.1% lower than expected but unchanged from Q1. Core PCE rose by 0.1% for August, this was 0.1% lower than forecasted and saw core PCE y/y fall 0.3% to 3.9%. Retail sales were up 0.6%, vs. a forecast of +0.1%. Consumer confidence fell 3.1 points to 103.0.
Credit spreads were 3.5bps narrower on average over the month making credit one of the better performing components of the index. Financials were the best performing sector (-0.41%), this was followed by industrials (-0.74%) and utilities (-0.78%). YTD total issuance across financials reached A$102.7bn, which is A$20.8bn more than at the same period last year, of that, major bank issuances made up A$51.7bn.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/ishares-esg-australian-bond-index-fund-update-en-au-19.pdfAugust, 2023
The Bloomberg MSCI Australia SRI/ESG-Weighted A$100M Index (the “Index”) returned 0.74% in August. Credit (0.97%) was the best performing sub-component, followed by Supranational-Sovereigns (0.86%), Semi-Governments (0.86%) and Treasuries (0.61%).
MSCI has upgraded the ESG score of the McDonald’s Corporation from ‘BBB’ to ‘A’. The upgrade reflected improvements in the company’s corporate governance practices, which now lead those of most global peers (as of June 2023). Following changes in board composition, McDonald’s is no longer flagged for having a potentially entrenched board, or for over boarding and MSCI believe such practices may bolster oversight of management. In addition, as of the 2023 AGM, the company appointed two new women directors, with MSCI noting, the presence of at least 30% women on the board is an important threshold as per ratings their model.
Australian 2-year bond yields decreased 0.14% over the month to 3.79%, and 10-year yields fell 0.03% to 4.03%.
The RBA kept the cash rate unchanged at 4.10%, which was in line with market expectations but against what most economists thought, as 18 of the 30 surveyed were calling for a 25bp hike. Clearly, we have entered the fine-tuning phase of setting monetary policy which most likely means longer pauses as the macro data unfolds and the RBA remains “data dependent”. The key issues for the RBA will continue to be the unemployment rate being too low and the speed at which the RBA wants inflation to return to the mid-point of its 2-3% band. The SoMP was also released over the month, where the Bank does not see inflation falling below 3% until December 2025. This explains their current hawkish bias and the possibility more rate rises may still take place.
In Australia data continues to trend well with the wage price index (WPI) for Q2 seeing wages rise 0.8%. This was 0.1% lower than expected and saw the WPI y/y growth rate fall 0.1% to 3.6%. The CPI y/y print for July saw inflation fall 0.5% to 4.9%. The employment change saw 14,600 jobs lost, vs. a forecast of +15,000 gain. This saw the unemployment rate rise 0.2% to 3.7% as the participation rate dropped 0.1% to 66.7%. The NAB business survey saw business conditions fall 1 point to 10. while business confidence increased 3 points to 2. Consumer sentiment fell with the Westpac survey down 0.4% to 81. Retail sales for July increased by 0.5%, this was 0.2% better than expected. House prices rose as the CoreLogic index increased by 1% in August, which was 0.2% higher than the prior month. Australia’s trade balance delivered a A$11.3bn surplus which was ~A$250m higher than forecasted.
In the U.S., 2-year treasury yields decreased by 0.01% at 4.86% while the 10-year yield rose 0.15% to 4.11%.
The much-anticipated Jackson Hole Economic Symposium was held this month with the key takeaways from Fed Chair Jerome Powell being, the recommitment to restoring price inflation to the Fed’s longrun target and that the Fed will continue until the job is done, stating: “Although inflation has moved down from its peak—it remains too high. We are prepared to raise rates further if appropriate and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.” The catch is growth has remained more resilient than expected. Backed by a strong labor market and solid finances, consumers have kept the economy out of recession and as a result, even though the economy was expected to contract in the last two quarters of the year, economists have now revised their estimates and expect growth to stay positive.
U.S. economic data continues to be better than expected non-farm payrolls saw 187,000 new jobs created; this was 17,000 more than expected. Despite the increase the unemployment rate increased 0.3% to 3.8% as the participation rate rose 0.2% to 62.8%. Average hourly earnings for the month increased by 0.4%, which was 0.1% better than expected and saw the annual earnings growth rate remain at 4.4%. Inflation continues to trend in the right direction with headline CPI rising 0.2% in July. This was in line with expectations and saw CPI y/y come in at +3.2%, 0.1% lower than expected. Core CPI m/m also increased by 0.2%, which saw Core CPI y/y fall 0.1% to +4.7%. Preliminary GDP for Q2 rose 2.1% annualised, down 0.3% from Q1. The ISM manufacturing index increased by 0.4 of a point to 46.4, while the ISM services index was 1.2 points lower at 52.7. Retail sales increased by 0.7%, 0.3% better than expected.
Credit spreads were 10bps narrower on average over the month, with all sectors delivering positive returns. Credit continued to be the best performing sub index within the composite with utilities the best performing sector (+1.20%), this was followed by industrials (1.10%) and financials (0.87%). YTD total issuance across financials reached A$92.1bn, which is A$15.9bn more than at the same period last year, of that, major bank issuances made up A$48bn.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/ishares-esg-australian-bond-index-fund-update-en-au-18.pdfJuly, 2023
The Bloomberg MSCI Australia SRI/ESG-Weighted A$100M Index (the “Index”) returned 0.53% in July. Credit (0.84%) was the best performing sub-component, followed by SupranationalSovereigns (0.59%), Semi-Governments (0.42%) and Treasuries (0.49%).
MSCI has released new information regarding Bacrlay’s PLC, seeing their Overall ESG Score remain at 1. MSCI note that Barclays is under investigation in the United States over alleged manipulation of interest rates on variable-rate demand obligations (VRDOs). While in the United Kingdom, the FCA has ordered the bank to repay borrowers for timeshare loans allegedly sold unfairly by a timeshare operator in Malta. Australian 2-year bond yields decreased 0.28% over the month to 3.94%, and 10-year yields rose 0.04% to 4.06%.
The RBA kept the cash rate unchanged at 4.1% but it was a close call among market participants. The Board cited the need to assess more data but retained its hawkish rates guidance. The RBA’s decision to pause was to provide the Bank “some time to assess the impact of the increase in interest rates to date and the economic outlook”. The short statement confirmed a tightening bias yet was clear further rate hikes would be data dependent amid the uncertainty as to how much the economy will weaken and by when and how much inflation will decline. The RBA shifted back to the language they had used at their pause in April, namely that interest rates have increased a lot and are having a lagged impact. The RBA noted that “higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so.” But there is “uncertainty” as to how much, hence the decision to hold “provides the Board with more time to assess the state of the economy and the economic outlook and associated risks.” The bar to hike looks a little higher from this statement and it would be reasonable to expect another pause next month.
In Australia, data continues to be steady with the employment change seeing 32,600 new jobs created. This exceeded the expected +15,000 and saw the unemployment rate fall 0.1% to 3.5%, while the participation rate fell 0.1% to 66.8%. CPI for Q2 printed 0.2% lower than expected at 0.8%. This saw CPI y/y fall 1% to 6%. Trimmed mean CPI for Q2 was also 0.2% lower than expected at 0.9%, with the y/y growth rate falling 0.7% to 5.9%. The NAB business survey saw business confidence increase by 4 points to zero, while business conditions were up 1 point to 9. Consumer confidence was higher, with the Westpac survey up 2.7% to 81.3. On the downside, CBA household spending in June saw a fall of -1.7%, taking the annual growth to +2.4%, down from +4.7%. Retail sales declined by -0.8% in June, down from +0.7% in May.
In the U.S., 2-year treasury yields decreased by 0.02% at 4.88% while the 10-year yield rose 0.12% to 3.96%.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/ishares-esg-australian-bond-index-fund-update-en-au-17.pdfMay, 2023
The Bloomberg MSCI Australia SRI/ESG-Weighted A$100M Index (the “Index”) returned -1.18% in May. Treasuries (-1.40%) was the worst performing sub-component, followed by Semi-Governments (-1.27%), Supranational-Sovereigns (-0.55%) and Credit (-0.50%).
MSCI has upgraded the Commonwealth Bank of Australia (CBA) from ‘A’ to ‘AA’. The upgrade was driven by improvements in CBA’s consumer protection practices. MSCI’s latest assessment suggests the bank has fair advertising and debt collection policies that may help protect consumer interests. Further, MSCI noted a decline in their customer complaints over 2022 (-19% YoY). MSCI also highlighted that even though CBA have certain industry-leading talent management practices such as engagement surveys, there are controversies related to alleged underpayment of staff wages and benefits that weigh on its score.
Australian 2-year bond yields increased 0.51% over the month to 3.55%, and 10-year yields rose 0.27% to 3.61%.
The RBA raised the cash rate to its highest level since May 2012, raising by 25bps and taking it to 3.85%. The market was completely wrong-footed by the hike given the previously articulated preference to tolerate higher inflation and a slower return to target in order to preserve the gains made in employment growth. The RBA has effectively flipped its position and Governor Lowe made this quite clear in a speech delivered post the meeting in which he noted “We don’t need to get inflation back to target straight away, but nor can we take too long” and that the RBA is seeking to bring inflation down within a “reasonable time frame”.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/ishares-esg-australian-bond-index-fund-update-en-au-16.pdfApril, 2023
The Bloomberg MSCI Australia SRI/ESG-Weighted A$100M Index (the “Index”) returned 0.21% in April. Supranational-Sovereigns (0.49%) was the best performing sub-component, followed by Credit (0.46%), Semi-Governments (0.37%) and Treasuries (0.06%).
MSCI has downgraded DBS Group Holdings Ltd from ‘AA’ to ‘A’. The primary factors for the downgrade was related to the weakening of the company’s position in relation to the management of ESG-related risks, relative to the industry. While DBS leads most global peers on corporate governance, notably board structure and adopts a robust talent management program such as engagement surveys, its three-year (FY 2019-21) average staff turnover rate of ~12% was higher than the industry average of 9.3% for the same period; this also contributed to the downgrade. Further, DBS lags leading peers in data privacy practices. Australian 2-year bond yields increased 0.09% over the month to 3.04%, and 10-year yields rose 0.04% to 3.34%.
The RBA held the cash rate steady at the April meeting, maintaining the 3.60% level. This was in line with market pricing, but economists were more 50/50 on if the RBA would hike. The statement was a mix of mildly hawkish commentary offset by some dovish aspects. Maximum optionality is paramount for the RBA now and they have left the door open for more hike’s if needed. Their stance from the meeting indicated a ‘wait and see’ approach on inflation and monitoring the lagged impact of previous policy tightening. The market thought a relatively benign CPI print at end of April, which was delivered, would see the RBA hold in May, this however, was not the case.
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The Bloomberg MSCI Australia SRI/ESG-Weighted A$100M Index (the “Index”) returned 3.11% in March. Treasuries (3.52%) was the best performing sub-component, followed by SemiGovernments (3.19%), Supranational-Sovereigns (2.05%) and Credit (1.81%).
MSCI has upgraded Incitec Pivot Limited from ‘A’ to ‘AA’. The upgrade was driven by improvements in the company’s governance practices. As of November 2022, Incitec’s board no longer has overboarded non-executive directors. Furthermore, recent changes in its executive compensation policies may help allay potential shareholder concerns surrounding its pay practices. Relative to peers, Incitec has a strong business ethics framework, with detailed anti-bribery policies and whistleblower protection provisions. Australian 2-year bond yields decreased 0.64% over the month to 2.95%, and 10-year yields fell 0.55% to 3.30%.
The RBA delivered a 10th consecutive rate hike last week, raising the cash rate to 3.60%, as expected, and interest on ES balances to 3.50%. However, the RBA’s accompanying statement was unequivocally dovish, especially in the final paragraph. The central bank dropped its previous reference to “further interest rate increases” and replaced it with “further tightening,” which gives it more optionality, including the possibility of just one more hike. In addition, the RBA opened the door to a pause or possible peak in rates at any point depending on upcoming data.
Australian economic data was mixed in March as GDP for Q4 increased by 0.5%, missing its forecast by 0.3%. This saw GDP YoY fall to 2.7%, down from 5.9% but in line with expectations. Employment numbers saw 64,600 new jobs created. This was 14,600 more than expected and saw the unemployment rate fall 0.2% to 3.5%. The participation rate rose 0.1% to 66.6%. CPI y/y for February declined 0.6% to 6.4%. This was 0.4% less than expected. The NAB business survey saw business confidence fall 10 points to -6, while business conditions were down just one point to 17. Consumer confidence remained unchanged coming in at 78.5. Retail sales rose by 0.2% and in line with expectations. Private sector credit for February increased by 0.3%, vs. a forecast of +0.4%. Private sector credit y/y is now at 7.6%.
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The Bloomberg MSCI Australia SRI/ESG-Weighted A$100M Index (the “Index”) returned -1.30% in February. Credit (-0.59%) was the best performing sub-component, followed by Supranational-Sovereigns (-0.85%), Semi-Governments (-1.19%) and Treasuries (-1.57%).
MSCI has downgraded Austrian Bank, OeKB, from ‘AA’ to ‘A’ due to weaknesses in their data protection practices. The bank handles a significant amount of personal data and operates in Austria, where privacy laws are rigorous, making this a concerning issue. Furthermore, MSCI discovered that OeKB lacks an incident response plan to help mitigate risks related to potential security breaches, which is a significant gap. In addition to these shortcomings, OeKB has limited evidence of lending to small and medium-sized enterprises, placing them behind industry peers in financial inclusion initiatives.
Australian 2-year bond yields increased 0.47% over the month to 3.59%, and 10-year yields rose 0.30% to 3.85%.
The RBA met market expectations increasing the official cash rate by 0.25% in early February, however, the accompanying statement was more hawkish than anticipated by the market. Governor Lowe’s emphasis on the central bank’s commitment to “return inflation to target” unnerved bond investors, who had previously anticipated a near-term pause in the ratehiking cycle. This hawkishness repriced the yield curve with another 25bp hike expected in March.
Australian economic data was mixed in February with the employment numbers seeing a fall of 11,500 jobs (consensus +20,000). This saw the unemployment rate increased 0.2% to 3.7%. Q4 wages were slightly weaker than expected, increasing by 0.8%, vs. a forecast of +1%. Private capex for Q4 grew by 2.2%, beating expectations by 1.1%. The NAB business survey saw business confidence rise 7 points to +6, while business conditions increased 6 points to +18. Consumer confidence did not fare as well with the Westpac survey falling 6.9% to 78.5. Retail sales was also lower, falling 3.9%, vs. a forecast of -0.2%. House prices also struggled as the Core Logic house price index fell 1.1% in January.
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The Bloomberg Barclays MSCI SRI/ESG-Weighted A$100M Index (the “Index”) returned -2.01% in December. Credit was the best performing sub-component (-0.61%), followed up Supranational-Sovereigns (-0.65%), Semi-Governments (-2.35%) and Treasuries (-2.37%). ESG research by MSCI saw an ESG Rating upgrade of Aroundtown SA (AT1) from BBB to A. This was due to a removal of the Revenue Recognition Key Metric from the MSCI Governance assessment methodology due to the company’s relatively low accounting risk relative to global peers. Additionally, its board is no longer flagged for having overboarded executive directors, post the 2022 AGM.
Australian 2-year bond yields increased 0.29% over the month to 3.40%, and 10-year yields rose 0.52% to 4.05%.
The RBA hiked the cash rate by 25bps again in December, taking the OCR to 3.10%, in line with market forecasts. This marked the eighth consecutive month for rate hikes, and the RBA has now hiked the OCR by 300bps since May 2022. While some tentative signs of improvement on the inflation outlook were noted, the December Board Statement noted further action is still required to bring the current 6.9% inflation figure down to the target range. The December Board Minutes outlined that “a range of options for the cash rate could be considered at upcoming meetings in 2023”, and that future policy would be guided by “the state of the economy and the inflation outlook”.
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The Bloomberg Barclays MSCI SRI/ESG-Weighted A$100M Index (the “Index”) returned 1.53% in November. Treasury was the best performing sub-component (0.75%), followed up SemiGovernment (0.48%), Credit (0.15%) and Supranational Sovereigns (0.13%).
ESG research by MSCI saw an ESG Rating downgrade of Apple Inc (AAPL) from A to BBB. Apple’s reliance on outsourced hardware manufacturing exposes it to supply chain issues that may disrupt production or create reputational risks. Since 2020, Apple has been criticized for sourcing goods from multiple suppliers allegedly involved in human rights violations related to employing Uyghurs and other ethnic minorities in China. The recent reassessment of these controversies as a result of the methodology enhancement related to vulnerable demographics drove the downgrade.
Australian 2-year bond yields decreased 0.12% over the month to 3.11%, and 10-year yields fell 0.23% to 3.53%.
The RBA hiked the cash rate by 25bps again in November, taking the OCR to 2.85%. This was in line with market expectations. The RBA has now hiked the OCR by 275bps since May. In the Statement of Monetary Policy, inflation was upwardly revised to peak at 8% in Q4, and GDP was revised downwards. With inflation still considered “too high”, it is likely that interest rates will remain elevated, and the RBA still has more to do.
Australian economic data was weaker in November; however, inflation remains significantly above policy target and the labour market is still tight. October CPI came in softer over the month, rising by only 0.2% m/m (6.9% y/y), and surprising the market which had expected a 0.8% increase. This has moderated sharply from a 0.6% lift in September. Retail sales values in October were weaker than expected, falling 0.2% m/m, marking the first monthly fall in 2022. Market sentiment dropped as business conditions fell 1 point to 22, while business CBDM1222A/S-2645450-1/4 confidence declined 5 points to 0. Consumer confidence decreased from 83.7 to 78. The labour market remains robust as employment data came in stronger than expected, with 32,200 new jobs created (more than double the 15,000 consensus). The unemployment rate fell 0.1% to 3.4%, while the participation rate lowered by 0.1% to 66.5%.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/ishares-esg-australian-bond-index-fund-update-en-au-11.pdfOctober, 2022
The Bloomberg Barclays MSCI SRI/ESG-Weighted A$100M Index (the “Index”) returned 0.89% in October. Treasury was the best performing sub-component (1.21%), followed up SemiGovernment (0.63%), Supranational Sovereigns (0.55%) and Credit (0.37%).
ESG research by MSCI saw a controversy case downgrade of Apple Inc (AAPL) from severe to very severe. The case headline was “China: Allegations of forced labor in supply chain”. MSCI based the downgrade on the extensive scale of impact and serious nature of the alleged harm, specifically affecting Uyghurs and other ethnic minorities regarded as a vulnerable demographic. The accusations were linked to the company’s indirect role in sourcing goods from suppliers allegedly employing Uyghurs from Chinese government sponsored ‘Vocational Education and Training Centers’ (VETCs). At the time of the assessment, Apple Inc. did not meet any of the criteria for considering the case partially or fully concluded.
Australian 2-year bond yields decreased 0.08% over the month to 3.23%, and 10-year yields fell 0.13% to 3.76%. The RBA surprised the market in October by stepping down the pace of tightening as they increased cash rate by ‘only’ 0.25% to 2.60%. There was a clear acknowledgement by the board that the cash rate “has been increased substantially in a short period of time”. The RBA also signalled that it “expects to increase interest rates further over the period ahead” and “the sizes and timing of future interest rate increases will be guided by the incoming data”. Now that the RBA has returned to 0.25% rate hikes, the bar for the bank to switch back to 0.50% hikes will be very high from here.
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The Bloomberg Barclays MSCI SRI/ESG-Weighted A$100M Index (the “Index”) returned -1.34% in September. Credit was the best performing sub-component (-0.99%%), followed up Supranational Sovereigns (-1.09%), Treasury (-1.41%) and Semi-Government (-1.45%).
ESG research by MSCI saw a ratings upgrade of Coca-Cola Company (KO) from AA to AAA. MSCI noted this was due to a revised evaluation of exposure to product-safety and quality risks which led to a decrease in The Coca-Cola Company’s (TCCC) risk exposure. TCCC continues to lead peers in measures to tackle regulatory risks tied to potential misleading marketing, having a detailed code backed by regular audits. The upgrade also reflects MSCI’s reassessment of controversies related to corporate behaviour.
Australian 2-year bond yields increased 0.35% over the month to 3.34%, and 10-year yields rose 0.35% to 3.94%.
The RBA’s September decision was in line with expectations as the Board raised the cash rate target 0.50% to 2.35%. This was the fourth consecutive 0.50% hike and fifth hike in a row, taking the cash rate to its highest level since 2015. The accompanying statement was interpreted by the market as slightly dovish with the RBA acknowledging that the outlook for global growth had deteriorated and that there are widespread upward pressures on prices from strong demand, a tight labour market and capacity constraints in some sectors. RBA Governor Philip Lowe noted that the bank will continue to be “guided by the incoming data and evolving outlook for inflation and the labour market”.
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The Bloomberg Barclays MSCI SRI/ESG-Weighted A$100M Index (the “Index”) returned -2.46% in August. Credit was the best performing sub-component (-1.33%), followed up Supranational Sovereigns (-1.37%), Treasury (-2.74%) and Semi-Government (-2.80%)
ESG research by MSCI saw a ratings downgrade of SGSP (Australia) Assets Pty Ltd (SGCC) to BBB from A. This was due to a reassessment of the company’s ESG performance relative to its ESG industry peers. It was found that SGSP lags industry peers in managing talentrelated risks. MSCI found no evidence of procedures to address employee grievances, and of performance appraisals to provide feedback to employees.
Australian 2-year bond yields increased 0.56% over the month to 2.99%, while 10-year yields rose 0.54% to 3.60%.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/ishares-esg-australian-bond-index-fund-update-en-au-8.pdfJuly, 2022
The Bloomberg Barclays MSCI SRI/ESG-Weighted A$100M Index (the “Index”) returned +3.21% in July. Semi-Government were the best performing sub-component (3.59%), followed up Treasuries (3.51%), Credit (2.32%) and Supranational Sovereigns (2.20%).
ESG research by MSCI saw a downgrade of Commonwealth Bank of Australia (CBA) to ‘A’ from ‘AA’. The recent reassessment of CBA indicated a decline in the company’s ESG performance relative to its ESG industry peers contributing to the downgrade as of July 2022. While CBA’s loan portfolio has a relatively low exposure (~88% of total portfolio in FY 2021) to environmentally intensive industries, the bank has integrated enhanced environmental due diligence processes in its credit risk management framework. However, CBA continues to face criticism over funding fossil fuel-related projects.
Australian 2-year bond yields fell 0.20% over the month to 2.43%, while 10-year yields decreased 0.60% to 3.06%.
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The Bloomberg Barclays MSCI SRI/ESG-Weighted A$100M Index (the “Index”) returned -1.40% in June. Supranational Sovereigns (-1.11%) were the best performing sub-component followed by Credit (-1.23%), Treasuries (-1.32%) and Semi-Govt (-1.86%). ESG research by MSCI saw an upgrade of Ampol Limited (ALD) to ‘AA from ‘A’.
This was attributed to improvements in Ampol’s GHG performance and strategy. Scope 1 and 2 GHG emissions intensity reduced at a compound annual rate of 5% between 2019-21 and averaged onefifth of the peer average as of June 2022. Additionally, measures on operational emissions reductions and on products sold to customers have accounted for 10% of the short-term executive remuneration scorecard since FY2022, which is in line with leading industry peers. Australian 2-year bond yields rose 0.16% over the month to 2.63%, while 10-year yields increased 0.31% to 3.66%.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/ishares-esg-australian-bond-index-fund-update-en-au-6.pdfMay, 2022
The Bloomberg Barclays MSCI SRI/ESG-Weighted A$100M Index (the “Index”) returned -0.85% in May. Supranational Sovereigns (-0.23%) were the best performing sub-component followed by Credit (-0.55%), Semi-Govt (-0.89%) and Treasuries (-1.00%).
ESG research by MSCI saw an upgrade of Svenska Handelsbanken AB (SHBA), to ‘AAA’ from ‘AA’. Inclusion of the Corporate Behavior Theme in the Governance assessment was a key contributor to the upgrade decision, as Handelsbanken has strong business ethics policies and practices relative to peers. The bank has an ethics framework that includes detailed policies against bribery and money laundering, as well as board committee oversight. Further, enhanced cybersecurity practices, such as vulnerability testing and regular IT audits, may help preempt potential data breaches, which also supported the upgrade. Australian 2-year bond yields rose 0.02% over the month to 2.47%, while 10-year yields increased 0.23% to 3.35%.
The RBA delivered its first rate hike since 2010 lifting the cash rate by 0.25% to 0.35%. While increase was widely expected the size caught the market offside with consensus for a 0.15% rise. In response, the front-end of the money market sold off sharply, the implication being that the RBA were likely to being normalizing the cash rate quickly. The RBA believes a cash rate of around 2.5% would be “neutral” and that’s the level they are likely to target. The RBA remains upbeat on the growth outlook. Strong household balance sheets and high disposable income are expected to drive consumption growth, a large pipeline of activity is expected to underpin dwelling investment while an upswing in non-mining business investment is anticipated. With job vacancies surging and demand for labour strong, the Bank expects the unemployment rate to drift lower.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/ishares-esg-australian-bond-index-fund-update-en-au-5.pdfApril, 2022
The Bloomberg Barclays MSCI SRI/ESG-Weighted A$100M Index (the “Index”) returned -1.44% in April. Supranational Sovereigns (-1.04%) were the best performing sub-component followed by Credit (-1.28%), Treasuries (-1.51%) and Semi-Govt (-1.59%).
ESG research by MSCI saw them upgrade Coles Group Limited (Coles) to ‘AA’ from ‘A’. Coles has been upgraded based on MSCI’s reassessment of Coles’ food safety measures that indicates they require all private label food suppliers to meet internal food manufacturing requirements or to be certified to GFSI-benchmarked standards. These standards entail periodic supplier audits and product testing, which may help mitigate risks tied to potential food safety issues, thus contributing to the upgrade. Although the company’s practices are on par with those of peers, MSCI note multiple recalls in the past year (as of April 2022). Australian 2-year bond yields rose 0.64% over the month to 2.45%, while 10-year yields increased 0.29% to 3.13%.
The RBA maintained the cash rate target at 0.10% yet made it clear that the door is open for rate moves “over coming months”, though Governor Lowe noted this will be based on “additional evidence” e.g., CPI and Wage Price Index data. Overall, their statement was very hawkish, and it would ordinarily see a rate rise at the next available opportunity (May), which is what transpired. The removal of the word “patience” from the statement saw bank bills yields rise sharply, leaving the market priced for 8.5 hikes in total by the RBA. Governor Lowe recognised the forthcoming strong inflation data, and a strengthening labour market justified the hawkish shift.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/ishares-esg-australian-bond-index-fund-update-en-au-4.pdfMarch, 2022
Australian 2-year bond yields rose 0.71% over the month to 1.81%, while 10-year yields increased 0.70% to 2.84%.
The RBA maintained the cash rate target at 0.10%, and to no one’s surprise said they were “prepared to be patient” as they asses the inflation outlook. Geopolitical developments saw market volatility increase, pushing global levels of inflation up and prospective GDP growth rates down. Fixed income market volatility, as measured by the MOVE index, reached its highest level in 9 years. The uncertainty about the global outlook was not lost on the RBA as Governor Lowe noted, they have seen a breakout in global energy prices and acknowledged the shock could “extend the period of inflation being above central banks targets. This runs the risk that the low-inflation psychology that has characterized many advanced economies over the past two decades starts to shift.” The market expects the RBA to commence hiking the cash rate in June. It also seems the RBA are not committed to seeing two more CPIs before raising the cash rate.
With a brutal combination of heightened inflation concerns, RussiaUkraine war, hawkish global central banks, and markets pricing in huge increases in official cash rates there’s little wonder that bond volatility has reached its highest level since 2009. Last month saw the second and third highest monthly rise in 2-year and 10- year interest rates, respectively, since 2000. The macroeconomic outlook for Australia remains very positive underpinned by a very low unemployment rate of 4%. We expect this to continue to fall as labour market supply remains tight. Judging by the recent federal budget, supportive fiscal policies will remain in place for the next 12 months supercharging an already strong economic recovery. All this means is that the RBA have work to do in normalizing the cash rate back to a more ‘neutral’ level, however with eleven RBA hikes already priced in the market is well ahead of the RBA’s thinking. We expect the RBA to hike rates in June if not sooner.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/ishares-esg-australian-bond-index-fund-update-en-au-3.pdfFebruary, 2022
The Bloomberg Barclays MSCI SRI/ESG-Weighted A$100M Index (the “Index”) returned 0.09% in February. Supranational Sovereigns (-0.82%) were the top performing sub-component followed by Credit (-1.02%), Semi-Govt (-1.09%). and Treasuries (-1.31%).
ESG research by MSCI has seen them upgrade Verizon Communications to ‘AA’ from ‘A. The upgrade has been driven by Verizon’s robust governance practices relative to peers. The company continues to demonstrate strong management practices across several key ESG issues, notably in governance. Verizon performs relatively well compared to peers on privacy and data security management; which MSCI note, this may help the company mitigate remedial costs and regulatory risks in the event of a breach. Australian 2-year bond yields rose 0.22% over the month to 1.10%, while 10-year yields increased 0.24% to 2.14%.
The RBA maintained the cash rate target at 0.10%, and as expected, ceased the QE program. However, the accompanying post-meeting statement reinforced their stance that ending QE did not mean that rate hikes were imminent. This is because the RBA are not yet convinced that “sustainable” inflation and wage rises are apparent. Governor Lowe highlighted he intends to be “patient” in assessing how supply and demand factors settle following the supply-side related pandemic economic challenges.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/ishares-esg-australian-bond-index-fund-update-en-au-2.pdfJanuary, 2022
The Bloomberg Barclays MSCI SRI/ESG-Weighted A$100M Index (the “Index”) returned 0.09% in January. Supranational Sovereigns (-0.44%) were the top performing sub-component followed by Credit (-0.54%), Treasuries (-1.03%). and Semi-Govt (-1.29%) ESG research by MSCI saw them upgrade the African Development Bank (AfDB) to ‘AA’ from ‘A. The upgrade has been driven by having a robust ethical framework and strong financial inclusion initiatives. Methodology enhancements to the Corporate Behavior Theme resulted in a greater emphasis on business ethics practices and on exposure to risks related to corruption.
MSCI note, AfDB’s robust business ethics framework, which is a key contributor to the upgrade. It promotes ethical conduct among employees through training, and has a whistleblower protection scheme as well as policies against corruption. Improvements in the bank’s overall ESG performance relative to peers further supports the upgrade. Australian 2-year bond yields rose 0.29% over the month to 0.88%, while 10-year yields increased 0.23% to 1.90%. Domestic data was strong over the month with 64,800 new jobs being added to the economy. This was 4,800 more than expected and helped the unemployment rate lower to 4.2%, down 0.3%. CPI for Q4 delivered a meaningful upside surprise, rising by 1.3% for the quarter, which was 0.3% above market expectations and took CPI y/y to 3.5%. This brought the annual trimmed mean core inflation level, which is the RBA’s preferred measure of inflation, up to 2.6%, its highest level since 2014 and into the upper half of the RBA’s 2-3% band. November Retail sales were 4% higher than expected, growing by 7.3%. December private sector credit grew by more than expected, up 0.8% and this saw y/y growth increased to 3%. On the downside, the NAB business survey saw conditions fall 4 points to 8, while confidence crashed 24 points to -12. Consumer confidence also fell, slipping 2% to 102.2.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/ishares-esg-australian-bond-index-fund-update-en-au-1.pdfDecember, 2021
The Bloomberg Barclays MSCI SRI/ESG-Weighted A$100M Index (the “Index”) returned 0.09% in December. Semi-Govt (0.29%) was the top performing sub-component followed by Credit (0.19%), Supranational Sovereigns (0.17%) and Treasuries (-0.03%). ESG research by MSCI saw them upgrade Apple Inc. to ‘A’ from ‘BBB’. The upgrade has been driven by robust data security practices. With Apple announcing it has 1.6 billion active users. This is indicative of the large volume of sensitive personal data it handles and exposure to risks of compliance cost and adverse impact on reputation in case of a breach. The company monitors its data security programs through an overarching policy framework extending to all Apple and Apple-affiliated companies.
Further, MSCI noted enhancements to user rights for third-party cookie tracking across its devices. Australian 2-year bond yields fell 0.05% over the month to 0.59%, while 10-year yields decreased 0.02% to 1.67%. At its final meeting for 2021, the RBA kept the cash rate unchanged at 0.10%. After an action-packed November RBA board meeting, there were no hints at any forthcoming policy changes in early 2022 with the Bank repeating that they would continue their QE purchases at A$4bn per week until mid-February. Overall, the RBA messaging was relatively upbeat, notwithstanding the emergence of the Omicron Covid-19 variant. The Board noted that “the strain is a new source of uncertainty, but it is not expected to derail the recovery”.
The Bank was also bullish on the labour market noting job ads were at a historically high levels and firms are finding it difficult to hire workers. But they conceded that wages remain low despite the labour demand. Looking ahead markets are pricing in the first-rate RBA hike by mid-2022 and expect the cash rate to be at 1.0% by the end of 2022. This will all hinge on inflation, employment, and wage growth outcomes.
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