June, 2022
Recent outperformance in Australian equity markets reversed against developed market in June. The S&P/ASX300 Accumulation Index finished the month down 8.9%. This saw the FY22 year return -6.8%, the third such negative return in the past decade. In the month, consumer staples were the only sector that posted a positive return (+0.23%), albeit marginal. The market remained consumed by concerns of higher interest rates, driven by a 50bp hike by the RBA in early June. Compounding this, consumer and business confidence is dropping around the world as the reality of inflation and higher living costs bites. As a forecasting machine, the market is looking ahead to the next phase of the cycle and potential deterioration in company earnings.
With US equities now in a bear market, having corrected by more than 20%, bad news is becoming good news. That is, rising recession risk may still need to be priced into earrings, but it’s reflected in lower bond yields and valuations. Some predict the Fed may pause and even start to ease policy by the end of 2023, but for this to happen greater evidence that the structural drivers of inflation are abating is required. That said, the current reality is real yields are rising, which remain a headwind for equity markets and valuations. At the very least, it is safe to say that the neutral policy rate for central banks is now higher than it was prepandemic. The main reason is the shift in geopolitics and structural trade and energy and food prices, largely driven by the RussiaUkraine conflict.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/188995266.pdfMay, 2022
In May the ASX300 declined -2.76%, underperforming most global indices with the S&P500 broadly flat (-0.2%) and MSCI Global Equity Index (unhedged) -0.8%. Sector performance continued to favour the materials, financials, and energy sectors. Real estate (-8.9%) was the worst performing sector driven by Goodman Group (-14.3%) after Amazon reported slowing e-commerce growth and suggested it was looking to sublease warehouse space. Softer sales reports from US retailers Target and Walmart and suggestion inflation is starting to eat into consumer purchasing also added to concerns around growth expectations and added to the debate around potential for stagflation (higher inflation and rates and slowing economic growth), or worse recession. In Australia, the decision by the Reserve Bank in May to kick off a new tightening cycle, with a 25bp hike in the cash rate to 35bps, was a contributing factor to the markets relative underperformance. This is the RBA’s first hike since 201o. On the back of this the futures market is now assuming the cash rate is nearly 3.5% in a year.
Acknowledgement by Central Banks that they are now behind the curve and need to move off emergency settings and tighten financial conditions is adding to concerns growth will slow. At the end of the day by tightening rates central banks are seeking to tighten financial conditions and take some heat out of the economy. Tighten too much and economic growth suffers and it raises the spectre of recession. Tighten not enough and inflation becomes entrenched. It is a delicate balance, and the challenge of trying to orchestrate a soft-landing a herculean task given the uncertainty and structural challenges presented by the pandemic, rising geopolitical realignment and climate change.
Domestically, many of these challenges were laid bare in the Federal election contest, which saw the Labour party win enough seats to from a majority government. Rising energy prices, food.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/187900217.pdfApril, 2022
In April the ASX300 declined -0.8%, but relatively outperformed US equities with the S&P500 down -8.7% and NASDAQ falling 13.2%. The main driver was a more hawkish Federal Reserve, which hiked its official cash rate 50 basis points to 1%, indicated additional 50 basis point increases were be “on the table” at the next couple of FOMC meetings, and formally announced the start of quantitative tightening and decision to shrink its balance sheet from 1 June. This has had the impact of pushing up real yields and putting more pressure on valuations. This was most evident in the derating in growth and technology stocks, but also felt in interest rate sensitive sectors like housing and REITs.
There is no set playbook for returns when rates start to rise, but looking back at periods when this has been the case the common thread is valuations typically fall. The price earnings ratio of the ASX200 has fallen considerably since the start of the year and is now back close to its 20-year average of 14x. However, it reflects more the contraction in resource company multiples on higher (peak) earnings than necessarily the derating in high growth stocks. Growth stock valuations are still around 30% above 2018 levels, whilst nominal rate expectations are now close to 2018 peak hawkishness. This suggests there is potential for further contraction in valuations.
The Fed’s more hawkish stance has also raised concerns Central Banks will be tightening into a slowing cycle and raised the spectre of stagflation (higher inflation and rates and slowing economic growth) and mid cycle slowdown, or worse recession. Global growth estimates have been coming down over recent months with the Russia-Ukraine crisis and Chinese lockdowns. The risk Europe goes into recession seems increasingly probable. We see US and particularly Australia as overall better placed to absorb higher rates
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/187151508.pdfMarch, 2022
For the month the portfolio returned 6.68% underperforming the S&P/ASX300 Accumulation Index by -0.21%. During the month we added Netwealth Limited (NWL) to the portfolio. NWL is a specialty platform provider with strong growth in Funds Under Advice driven by a superior technology stack that is resulting in market share gains from the incumbent platforms including ANZ, IOOF, MLC and BT Panorama.
Uniti Group (UWL) was the beneficiary of a takeover bid from two independent parties; the Morrison - Brookfield Infrastructure Group consortium, and secondly, a rival bid from Macquarie Infrastructure and Real Assets (MIRA). The competing bids highlight the reason we were attracted to UWL initially - long duration social infrastructure type assets with stable and recurring revenue streams.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/186224555.pdfFebruary, 2022
Equity markets continued their volatile start to the year in February. The invasion of Ukraine by Russian forces late in the month added to existing concerns around rising inflation and interest rate expectations and impeding monetary policy tightening that has consumed the market since the start of the year. Despite this the ASX300 Accumulation Index finished up 2.09%, outperforming the MSCI Global Index (-5%) and global indices. The consumer staples (+5.8%) and energy (+5.6%) were strong performers for the month, whilst the technology sector underperformed (-4.6%),
The Australian February reporting season provided the opportunity to gain a broad insight into the underlying economy and operating environment. By and large, the results season was solid with around 90% of companies reporting top line revenue growth in-line or better than consensus and 49% of companies beating earnings expectations. Aggregate earnings for the ASX200 for FY22 was revised upwards by approximately 2% with earnings growth now expected to be close to 13-14% for the 2022 financial year.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/184841272.pdfJanuary, 2022
The Australian market was down 6.5% in January after rising 2.8% in December. Volatility was again a centrepiece of equity markets during January driven by concerns the Omicron strain has exacerbated supply chain issues and amplified cost pressures adding to inflationary concerns. Recent economic data has also done little to offer any respite that The Federal Reserve and RBA are behind the curve and need to be seen to be doing something about inflation.
Discussion during Jerome Powell’s January Congressional Testimony that the Federal Reserve may start shrinking its balance this year further added to market nervousness. The last time we had rate hikes plus QT in late 2018 the S&P500 fell around 20%! The Australian market was not immune to the more aggressive Fed language, and a higher-than-expected domestic CPI result coupled with a lower unemployment rate have led to increased pressure on the RBA for policy tightening. In keeping with the shift in market sentiment and rising inflationary and rate expectations cyclical and value sectors outperformed in January. Energy (+7.9%) was the top performing sector with Utilities (+2.6%) and Materials (+0.8%) the only other positive sectors. More long duration and growth sector fell the most with Info Tech (-18.4%) and Health Care (-12.1%). This also saw large caps preferred over mid and small caps, while Resources outperformed Industrials across all size bias indices. MSCI Value outperformed MSCI Growth by 8.5% in the month.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/183911929.pdfDecember, 2021
The quarter was defined by the emergence of the Omicron wave of the virus and hawkish pivot by the Fed now it no longer sees inflation as ‘transitory’.
There is no set playbook for returns when the Fed raises rates but looking back at periods when this has been the case the common thread is valuations typically fall and returns are driven by earnings and dividends.
The quandary is navigating the prospects of reopening and better earnings as supply shocks ease and peaking in inflation, against more hawkish central bank policy if supply chain issues and inflation persist.
We continue to favour selective reopening trades and higher cyclical exposure which not only stand to benefit as demand recovers from the pandemic but also as rates tighten. We also think it’s important to maintain a diversified portfolio and retain a healthy position to quality growth companies with a margin of safety.
In positioning for the prospects of reopening, tapering and more persistent inflationary pressures we added Computershare and increased our commodities and energy exposures. We also initiated a position in EBOS.
The Fund returned 2.24% in the December quarter outperforming the S&PASX300 Accum. Index by 0.03%. The top portfolio contributors were National Australia Bank, Macquarie Bank and Cooper Energy whilst Marley Spoon, Alibaba and Carbon Revolution were the largest detractors. Cash at the end of quarter was 2.2%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/182658698.pdfNovember, 2021
The Australian S&P/ASX300 Accumulation Index closed down -0.53% in November, but outperformed global indices with Developed markets declining -1.4% and Emerging markets -3.2%. Volatility was a centrepiece of equity markets during November. Early in the month, the tailwind of the broader economic recovery helped push markets and inflation expectations higher but was met intra month by more hawkish commentary from central banks, most notably with the Fed announcing its tapering plans. This was largely anticipated and saw markets trade higher before the emergence of the Omicron strain and onset of renewed concerns around lockdowns and economic growth.
Consistent with our approach to date in managing the uncertainty created by Covid, and learning to live with the virus, we see it as important to not jump to conclusions based on bogus assumptions and things we do not know and cannot know. Rather, our approach continues to be to try and understand what is going on rather than suggest we know what’s going on, manage risk and embrace the uncertainty where it is sensible to do so.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/181793030.pdfOctober, 2021
The Australian Equity market underperformed global equities in October with the ASX300 accumulation Index returning 0.1%. The focus has shifted from the impact of lockdowns and restrictions to the pace of vaccination, reopening, economic recovery, inflation, and interest rate implications. The decision by the Reserve Bank of New Zealand to start raising rates during the month has magnified the focus around central bank tightening, and more particularly whether the US Federal Reserve is underestimating the persistence of inflation and will be forced to raise rates more aggressively.
Supply disruption and bottlenecks have been exacerbated by the Delta strain and lockdowns, broadening inflationary pressures out to food, energy and wages. Brent oil finished the month at US$84.38 per barrel, up a further 7.5% while natural gas in Europe continued to squeeze higher based on supply constraints and expectations of a cold winter ahead. How persistent and sticky these increases prove to be remains the question? Domestically, the Australian September quarter CPI number saw a meaningful increase, coming in at 2.1%. This is the first time the Reserve Bank of Australia (RBA) has met its 2 to 3% objective since late 2015, and it breaks the narrative that this target would not be met until 2023.
The September quarter CPI print caused the bond market to challenge the RBA’s resolve to continue with its Yield Curve Control (YCC) policy and transitory inflation thesis, with the three-year Australian bond yield surging to 1.4% at the end of month. This resulted in the ASX300 selling off 1.4% on the last day of the month.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/180945691.pdfSeptember, 2021
The rally in equities continued last quarter with growth stocks again outperforming cyclicals. The S&P/ASX300 Accumulation Index returned 1.79% and is up 30.9% for the last 12 months. The cycle is evolving and there are an increasing number of emerging risks bubbling to the surface including slowing growth, inflation, tapering, geopolitics, and China regulatory reform. The course of the pandemic remains the central influence on financial markets and policy positioning.
During the quarter the surge in the Delta strain saw renewed lockdowns and the economic disruption, raising concerns growth has peaked. The Delta strain has exacerbated supply chain disruptions, triggering a surge in freight, labour and energy costs. This is challenging the transitionary inflation view and raising the spectre of stagflation (the ugly combination of rising prices on weaker growth). In positioning for the prospects of reopening, tapering and more persistent inflationary pressures we have exited Reliance Worldwide, Carsales.com, Tencent and RIO Tinto and added Corporate Travel and BHP. The Fund returned 1.49% in the September quarter underperforming S&P/ASX300 Accumulation Index by 0.30%. The top portfolio contributors were Uniti Group, Carsales.com and Macquarie Bank whilst BHP, Alibaba, and Marley Spoon were the largest detractors.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/180253846.pdfAugust, 2021
In positioning for the prospects of reopening and tapering we continue to actively manage the portfolio and weight it to our highest conviction ideas. During the month we exited Reliance Worldwide and initiated a position in Corporate Travel.
Corporate Travel is leveraged the reopening and post the recent acquisition of Travel and Transport is well positioned in the US and UK markets where vaccinations are more progressed and skews to domestic travel which is positive at a time when there is still significant uncertainty around the opening up of international travel and borders remain closed. Reliance Worldwide has been a Covid winner benefiting from the strong recovery in the US housing market and increased demand as homeowners have remodelled and renovated.
The recent result beat the top of market earnings expectations, but we see the upcoming year will challenge the business with rising input costs and supply chain issues and assumed non-recurrence of benefits from the US freeze event this year. We also exited Rio Tinto, switching into BHP which we see as having a more diversified commodity exposure and better leverage to soft commodities production through potash, and future-facing commodities (used in batteries and electrification ) through its nickel business. The decision to collapse the DLC structure and demerge the energy business to Woodside Petroleum has the potential to create some short term volatility in the share price, but longer term we see value creation through the reallocation of capital to potentially higher returning projects with the energy assets better suited within a dedicated oil and gas vehicle.
We also added to Chorus Ltd (CNU) following an update in August that goes towards providing a degree of regulatory certainty that we expect will underpin an attractive yield in the years ahead. Our analysis suggests the current share price implies an expected dividend yield of between 7-10%.
By way of comparison Transurban and Sydney Airports have historically traded on dividend yields of around 4-5%, and Telstra is currently trading on 4.6%. As the regulatory setting becomes clearer and the business transitions from network construction to operatorship, we expect capex to decline materially and free cashflow and dividends to increase significantly resulting in a strong re-rating in the share price and yield. On finalisation of the regulatory setting over the next 6-12 months Chorus will occupy a near monopoly position in NZ fibre telecommunications (the NZ equivalent of NBN) and be able to increase prices in line with CPI.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/178795236.pdfJune, 2021
The rally in equities continued last quarter, with growth stocks playing some catch up with cyclicals. The S&P/ASX300 Accumulation Index returned 8.48% and is now up 28.5% for the last 12 months, 57.8% off its March 20 COVID lows and has posted a positive return 14 out of the last 15 months.
• Equities can continue to rally on the re-opening dynamic as the vaccine roll-out proceeds, but there are a number of issues to navigate into the second half of the year – peaking in growth, persistence of inflation and how we live with the virus.
• The key question remains whether the inflation scare in the last quarter will prove transitory or is more structural in nature and how central banks respond.
• Any hint of earlier than expected tapering by central banks, and therefore earlier than expected interest rate hikes remains the main risk for a market correction.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/174727254.pdfMay, 2021
For the month the portfolio returned 0.24%, underperforming the ASX300 Accumulation Index by -2.07%. Uniti Group (UWL) was top contributor during the month. The company is currently benefiting from difficulties NBN is experiencing in transitioning its work force to a new management system which is impacting their connections and service works. The near-term benefits for UWL are likely limited, but it opens the door to helping Uniti secure longer term contracts with larger developers (like Stockland and Mirvac) and increase market share and network penetration.
Carbon Revolution (CBR) was the main detractor from performance for the month. Following raising capital for the expansion of its factory expansion in April, the company announced in May that one if its customers had requested to suspend production of contracted wheels in FY21 (c.10-15% of revenue) because of ongoing shortage in semi-conductor chips limiting car production. It is expected production of these wheels will recommence in July.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/172917472.pdfApril, 2021
Equity markets continued where they left off in March, moving higher across the board. This strong performance was underpinned by extremely easy fiscal and monetary policy settings, evidence of a strong rebound in growth and earnings, and stabilisation in bond yields. Australian equities rose 3.7%, lagging the 5.3% rise in the S&P 500 and 4.0% rise in the MSCI Global Equity Index (ex-Australia hedged $A). Notably, the reflation trade remains intact even though global daily new COVID-19 infections reached new highs.
Financial market strength was broad based, with industrial metals generating the strongest returns while the trade-weighted dollar posted the greatest losses. This performance implies that investors are looking ahead towards the light at the end of the tunnel. Pandemic dynamics in the US and UK are a reason to be optimistic with activity levels gradually normalising amid the rapid pace of vaccinations. It was is not surprising that US and UK equities were the best-performing stocks in April.
Given the reprieve for bonds, it was long duration sensitive technology and growth names that drove the outperformance in the domestic market. Technology (+9.7%), Materials (+6.8%) and Industrials (+4.3%) were the best sectors, while Energy (-4.9%), Consumer Staples (- 2.5%) and Utilities were the laggards.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/171667618.pdfDecember, 2020
The COVID recovery in markets continued in the December quarter with the ASX300 Accumulation Index up 13.8% and is now up near 50% from March lows. The US election result, positive vaccine news, and ongoing accommodative monetary and fiscal policy provided further impetus and investor confidence that economies can continue to recover, and the equity market cycle move from ‘hope’ to ‘growth’. At a sector and stock level this saw a sharp rotation in market leadership with more cyclical and value orientated sectors and stocks outperforming. Energy (+26.8%) and the banks (+26.0%) led the way whilst Technology (+22.7%) and Resources (+18.6%) also performed strongly. The fund returned 9,42% for the quarter, underperforming the ASX300 Accumulation benchmark by -4.37%. For the 12 months to 31 December the fund has returned 8.15% outperforming the benchmark by 6.41%.
During the quarter, we added to our quality cyclical holdings including initiating a position in Qube Holdings and exited Amcor. We also lightened our gold position, but still see it as a hedge against rising. The COVID crisis has seen the sharpest and quickest economic contraction since the great depression, but also elicited the largest global co-ordinated policy response in history. The magnitude and speed with which this has happened is easy to gloss over, but unprecedented. In Australia lone in excess of $350bn has been provided in stimulus and relief to bolster household and business cashflow at a time when interest rates and bond yields have declined to historical lows.
The result is household savings has risen, unemployment and business failures have been suppressed and economic activity and stock markets have roared back close to or above pre-COVID levels. All most unusual in a recession. Equities have seen strong inflows with switching out of bonds in search of higher returns coupled with a surge in retail investor participation on FOMO (fear of missing out). Excess liquidity and investor confidence monetary and fiscal policy will remain accommodative has helped fuel this rally. Moreover, it is the expectation rates will remain low for a long time (or ever!) and belief that the ‘Policy Put’ - that central banks and government will intervene if the economy or markets splutter, is alive and well.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/163384000.pdfticker: ETL0383AU
release_schedule: Quarterly
commentary_block: Array
factsheet_url:
asset_class: Domestic Equity
asset_category: Australia Large Growth
peer_benchmark: Domestic Equity - Large Growth Index
broad_market_index: ASX Index 200 Index
structure: Managed Fund
manager_contact_details: Array
fund_features:
SGH Australia Plus aims to outperform the ASX300 Accumulation Index by 500bp over a rolling 3 year time frame. Designed for investors seeking medium to long term capital growth potential by investing in a diversified portfolio of stocks comprising listed companies that are in the S&P/ASX300 Index with a non index position of up to 20% invested in Asian listed securities.