September, 2023
In September global equities (-3.8%) trended down in most regions, mainly driven by the US Fed signalling no immediate end in the current high level of US rates at its August meeting: with the Information Technology and Utilities sectors the notable underperformers. The Australian share market also declined (-2.9%) despite the RBA keeping interest rates unchanged. Notable declines for the Australian market were within Information Technology, Health Care and Telecommunications sectors.
Worldwide, government bond yields continued their upward path following the re-setting of higher US interest rate expectations. The Australian 10-year government bond yield increased by 46 basis points to 4.5%. Similarly, the US 10-year government bond yield increased by 47 basis points to 4.6%, the highest level since 2007. The move higher in US yields resulted in a stronger USD with the Australian dollar (AUD) depreciating to around 64 US cents. Commodities were mixed with oil prices up 9.7% to US$95.31/barrel, following supply cuts announced by the Organization of the Petroleum Exporting Countries (OPEC). Iron Ore prices were also stronger (1.7%) following some supply disruptions, while gold and copper prices fell over the month (-4.8% and -2.2% respectively), as Chinese demand continued to soften.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/Mercer-Funds-Monthly-Report-SEP-2023.pdfAugust, 2023
In August, equities lost momentum and weakened (in local currency terms) after a strong rally over recent months. On a relative basis, US equities outperformed most major developed and emerging markets, while growth stocks generally outperformed value. Fixed income returns were broadly flat to slightly negative. The real asset sector saw the largest declines, with global REITs and infrastructure down markedly.
A combination of weaker forward-looking indicators, a modest uptick in inflation data, particularly in the US, and Fitch Ratings’ downgrade of its US credit rating at the start of August, impacted returns.
Composite purchasing manager indices (PMI) continue to soften across the globe with the US Composite PMI falling to a six-month low in August. A similar scenario for the Eurozone, China, UK and Australia, however, Japan bucked the trend with a marginally higher reading.
Consumer confidence continues to weaken with increasing signs of consumer distress, such as rising credit card and auto-loan delinquencies. After a period of strength, global labour markets appear to be cooling off. US employment data saw a distinct weakening in August with a solid uptick in its unemployment rate (+0.3% to 3.8%).
Headline inflation dropped sharply in the Eurozone and UK, largely driven by base effects as the 2022 inflationary spike rolls off. Elsewhere, inflation ticked up slightly in the US as a bounce in energy prices fed into its CPI numbers, however, CPI data was broadly unchanged in Japan and China.
At the annual summit in Jackson Hole, Wyoming, central bankers expressed cautious optimism, while acknowledging inflationary expectations remain elevated. Federal Reserve Chairman, Jerome Powell, reiterated the Fed’s goal of bringing inflation down to its 2% target and is prepared to lift rates further if required. The Bank of England raised interest rates for the 14th consecutive month with its policy rate now sitting at 5.25%. On the flipside, the People’s Bank of China introduced a number of easing measures, cutting its key interest rate (1yr Loan Prime Rate) to a record low of 3.45%.
In terms of August returns, Hedged Developed Markets Overseas Shares declined -1.9% and Unhedged Emerging Markets Equities dropped -2.4%. Hedged Overseas Government Bonds delivered a narrow loss of -0.3% over the month as government bond yields experienced an uptick in most major regions. Using 10 year government bonds as a guide, US yields saw a jump of 16bps, both Japan and UK were up 6bps, however, there were slight declines for German and Australian 10 year yields.
Australian Shares returned -0.8% in August, outperforming hedged overseas counterparts. Key contributing sectors were Consumer Discretionary (5.8%) and Real Estate (2.2%), whereas Materials (-2.0%) and Consumer Staples (-3.1%) detracted.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/Mercer-Funds-Monthly-Report-AUG-2023.pdfJuly, 2023
In July, global equity markets maintained current upward momentum with most regions delivering solid, positive returns. On the other hand, fixed income performance was mixed, although in this “risk on” phase of the cycle, riskier parts of the sector fared better.
A combination of further declines in headline inflation, resilient economic data, particularly from the US, and market expectations that the current interest rate hiking cycle is nearing an end, led to positive investor sentiment throughout the month.
The advanced Q2 2023 US GDP growth figure was reported late month, coming in at 2.4% and surprising market economist estimates of 1.8%. On the flipside, UK and Eurozone growth was close to flat. Benefitting from the base effects of emerging from its extensive 2022 Covid lockdown, China’s GDP growth rate was measured at an annualised 6.3%, though a little below 7.3% expectations. Forward-looking composite purchasing manager indices (PMI) kept falling across the globe in July, with Japan the only region holding steady. PMIs for the services sector continue to outpace manufacturing though are easing towards 50, an important level that is considered the line between expansion and contraction.
Inflation data continued to decline, somewhat aided by the impact of last year’s energy price surge rolling off. US headline Consumer Price Index (CPI) fell to 3.0% p.a and is at the lowest level since early 2021. Similarly, CPI data across the UK, Eurozone and Australia, continues to show easing inflationary conditions, albeit at higher levels than the US. CPI has flatlined at near zero in China. Japan was the only major country that recorded a marginal increase in its inflation rate during Q2 2023. Central banks continued to err on the side of caution, increasing rates by 25bps in the US and Eurozone and 50bps in the UK, where inflation remains the highest among major developed economies. Central banks continued to emphasise a data-driven approach to future rate adjustments. In the US, which is furthest ahead in the inflation cycle, markets are now pricing in a greater than 50% chance that the Fed’s policy rate has peaked and interest rate cuts maybe forthcoming in 2024.
Over July, Hedged Developed Markets Overseas Shares delivered a 2.8% return. US indices were broadly in line with international developed markets, however, Emerging Markets (unhedged) outperformed with a positive 4.9% return. Value modestly outperformed growth over the period, although when looking on a year-to-date basis, mega-cap tech stocks still dominate returns and has led to increased market concentration within that segment of global markets. In the US, with roughly half of S&P500 companies having reported their Q2 2023 earnings, FactSet currently projects a 7% quarter over quarter (QoQ) earnings decline, which would be the softest quarterly outcome since the height of Covid’s impact. That said, to date the majority of companies have reported better than expected earnings results.
Hedged Overseas Government Bonds returned -0.4% over the month, as bond yields across most regions increased in July. Yields on both key long bonds in the US (10-year and 30-year) rose by approximately 15bps over the month. Outside the US, Japan’s 10-year yield rose by around 19bps, which is noteworthy following the Bank of Japan’s announcement that it will further increase the upper tolerance range for the 10-year yield (now 1.0% vs 0.5% previously). The UK was the only major economy where the 10-year yield fell, albeit modestly.
Australian Shares returned 2.9%, marginally outperforming their overseas counterparts in July. Financials (4.9%) and Energy (8.4%) were the strongest sectors of the market, while Healthcare (-1.5%), and Materials (1.4%) detracted.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/Mercer-Funds-Monthly-Report-JUL-2023.pdfJune, 2023
In June, global equities, commodities and REITs posted strong returns, while bonds were generally flat with credit outperforming government bonds.
Markets continue to price in a soft landing as news flow remains focused on falling headline inflation, a potential end to the global interest rate hiking cycle and broad economic resilience, despite challenges for some sectors, such as regional banks.
Inflation continues to edge down in most major economies raising hopes that the hiking cycle is near an end in most regions. Although the Federal Reserve kept rates on hold for the first time in over a year, forward guidance was more hawkish than expected, which weakened the positive momentum that markets carried during the first half of the month. The ECB and RBA hiked rates by 25bps each, while the Bank of England was compelled to hike by 50bps, given stubbornly elevated levels of inflation in the UK. China continued to ease as its expected economic recovery has been underwhelming. Labour markets remain resilient, with unemployment only marginally rising in some regions, however, remaining close to multi-decade lows.
Volatility in rate markets fell in June, following the resolution of the debt ceiling talks, and the pause in monetary tightening in the US. Bond yields rose slightly in June, while credit spreads slightly decreased during the month.
Over June, Hedged Developed Markets Overseas Shares returned 5.6%, US stocks outperformed emerging markets and other international developed markets. Value and growth stocks delivered similar results in June, although year to date growth has significantly outperformed value. Japan contributed significantly to the outperformance of developed markets, gaining 7.5% in June, as the Bank of Japan continues to stimulate the economy.
Emerging Markets Shares (UH) gained 0.9%, held back by weakness in China. Latin America was the standout in emerging markets as the recovery in commodities provides a tailwind for its equities.
Hedged Overseas Government Bonds returned -2.3% over the month, as bond yields generally increased during June. In the US, the 10-year bond yield rose by 16bps. In developed markets outside the US, 10-year yields fell by 3bps in Japan, while yields rose 20bps in the UK, and 13bps in the Eurozone. US inflation expectations, as measured by the 10-year inflation breakeven rate, was unchanged and ended June at 2.2%.
Australian Shares returned 1.7%, underperforming their overseas counterparts in June. Materials (4.6%) and Financials (3.1%) were the strongest sectors, meanwhile Healthcare (-6.4%), and Communication Services (-1.0%) were the largest detractors.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/Mercer-Funds-Monthly-Report-JUN-2023.pdfMay, 2023
In May, risk asset returns in developed markets were mostly negative, bonds and real assets also generally declined. Emerging market equities returns were marginally positive.
News flow during May focused predominantly on the debt ceiling deadline looming in early June. Overall, the market impact has been fairly limited, although ratings agencies have placed US credit on watch for potential downgrades. The challenges facing regional banks in the US continued to be a major topic in early-May with regulators brokering a deal for JP Morgan to purchase First Republic Bank. However, the sell-off in shares of other vulnerable banks continued along with sizable deposit outflows.
Economic data in general remained resilient. US unemployment rose slightly in May but remains at historically low levels, although, other indicators such as wage growth show that the labour market is gradually cooling. Forward-looking purchasing manager indices remain in expansion territory across most major regions, with strength in services outweighing weakness in manufacturing. In spite of economic resilience, headline inflation continued to decline in most major economies with it falling to just under 5% in the US. Inflation in Japan rose to 3.5%, which is high by historical standards, but still lower than in other developed countries. In the UK and Eurozone, inflation remains more resilient, but also on a downward trajectory.
Inflation in China remains low amid a slow and developing expected economic recovery. Rate markets continue to grapple with the question of how long monetary policy will remain tight. The bond market is pricing in an initial rate cut toward the end of this year or early next year, but US Fed officials have generally cast doubt on that timeline. Credit spreads moved slightly higher during the month. Issuance is coming back after a slowdown earlier in the year when the first signs of distress emerged among US regional banks.
File:April, 2023
In April, risk asset returns in developed markets were mostly positive, while defensive assets also provided modest gains. Emerging market equities were lower than their developed market counterparts on the weakness in Chinese stocks News flow during April was fairly quiet until the last week of the month when banking concerns resurfaced, as First Republic Bank came under pressure and was ultimately acquired by JP Morgan.
Equity market volatility ended the month at its lowest level since late-2021, despite a brief spike during the last week of the month. Major economies remained resilient, driven largely by service activity. US GDP for Q1 2023 rose at a 1.1% annualized rate, which was below expectations. Consumer confidence remained on the rise and labour markets remained tight, in spite of high profile layoffs in the US. Headline inflation continued to decline in major economies, reaching 5.0% in the US, which is its lowest level since mid-2021. In the UK, inflation fell by less than expected and remained above 10.0%, the highest rate in major developed economies. The People’s Bank of China and Reserve Bank of Australia left key lending rates unchanged.
Over April, Hedged Developed Markets Overseas Shares returned 1.6%, even though the US earnings season delivered a fair number of positive EPS surprises relative to expectations, the earnings decline over the first quarter is set to be the largest since the second quarter of 2020. Returns were positive for most sectors with consumer staples delivering the largest gains for the month.
Value outperformed growth among large and mid-cap stocks, while growth outperformed among small-caps. Emerging Market Shares (UH) underperformed unhedged Overseas Shares in April. Weakness in China outweighed better performance for India and Brazil. Hedged Overseas Government Bonds returned 0.2% over the month as Bond yields generally saw modest changes for most countries during the month. In the US, the 10-year bond yield fell by 4bps, while the 30-year yield was flat. In developed markets outside the US, 10-year yields rose by 6bps for Japan and 23bps for the UK.
US inflation expectations, as measured by the 10-year inflation breakeven rate, fell from 2.3% to 2.2%. Australian Government Bonds were flat over the month. Lending conditions remain somewhat stressed due to banking concerns but bond markets have remained fairly calm. Credit spreads generally declined during the month, with investment-grade spreads falling 2bps and high yield spreads declining 3bps.
Australian Shares returned 1.8%, underperforming their overseas counterparts in April. Real Estate (5.2%) and IT (4.5%) were the strongest sectors, meanwhile Materials (-2.6%), and Utilities (1.4%) were the largest detractors.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/Mercer-Funds-Monthly-Report-APR-2023.pdfMarch, 2023
Risk asset returns were mixed over March, whilst defensive assets delivered gains as markets digested financial sector developments in the US and Europe.
Financial distress at a California-based regional bank culminated in the second biggest US bank failure in history. Two other regional banks also went into administration. Outside the US, investors digested UBS’s takeover of Credit Suisse and subsequent turmoil in bond markets. Swiss authorities let Credit Suisse’s riskiest bonds be wiped out, while equity holders received a small amount of equity in UBS as part of the transaction. While these issues were seen as idiosyncratic and largely driven by poor management of individual banks, there is a pattern of weaker businesses struggling amid high interest rates and declining market liquidity.
Employment and activity data continued to be resilient in the US with signs of recovery emerging from the UK and Europe. Inflation in the US continued to trend down. However, inflation fell by less than expected in the Eurozone and rose in the UK. Central banks consequently hiked rates by 25 bps in the US / Eurozone and 50 bps in the UK.
Over March, Hedged Developed Markets Overseas Shares returned 2.5%, most sectors posted positive returns, although financials sold off strongly amid the banking turmoil. Cyclical areas of the market such as small-caps and energy also struggled. Emerging Market Shares (UH) marginally underperformed unhedged Overseas Shares in March. China, Taiwan and Korea had modestly positive returns in USD terms, whilst Brazil experienced slightly negative returns.
Hedged Overseas Government Bonds returned 2.6% over the month as bond yields fell sharply across the developed world. In the US, 10-year and 30-year bond yields fell 44bps and 26bps, respectively. In developed markets outside the US, 10-year yields fell by 20–50 bps. US inflation expectations, as measured by the 10-year inflation breakeven rate, fell from 2.4% to 2.3%. Australian Bonds also produced a positive return of 3.5% over the month as yields decreased.
Since the demise of Silicon Valley Bank and emergency merger of Credit Suisse and UBS, liquidity in fixed income markets has diminished and fundraising has slowed with limited corporate bond issuance or IPO activity.
Australian Shares returned -0.2%, underperforming their overseas counterparts in March. Materials (5.6%) and Communication Services (3.3%) were the strongest sectors, meanwhile Property (-6.9%), and Financials (-4.9%) were the largest detractors.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/Mercer-Funds-Monthly-Report-MAR-2023.pdfFebruary, 2023
Both risk and duration assets sold off in February as pessimism over the monetary policy outlook took hold. The US economy is showing few signs of a material slowdown in spite of almost a year of monetary tightening. Even though more large companies announced layoffs in February, the labour market as a whole remains exceptionally strong. Consumer confidence strengthened to the highest level in over a year, retail spending came in much stronger than expected and one of the forward looking purchasing manager composite indices returned into expansionary territory. Outside the US, economic data also indicated stronger growth momentum. Consumer inflation continued to come down from high levels in the US, UK and Eurozone, although increased in Japan and China. US producer inflation, however, came in stronger than expected. The combination of a resilient economy and mixed signals on inflation turned sentiment for the worse. Markets once again priced in the possibility of more inflationary growth momentum that could force central banks to continue with monetary tightening.
Over February, Hedged Developed Markets Overseas Shares returned -1.6% as earnings season continues to be disappointing. Earnings appear set to decrease for the first time since mid-2020. Earnings aside, increased concerns over more monetary tightening than was priced in at the beginning of 2023 added to negative sentiment. In February, emerging markets underperformed developed equities, declining 2.3% as large markets such as Brazil, India and Korea saw negative returns. While foreign inflows into China have been strong over the last few months, domestic equity investors still remain cautious. Hedged Overseas Government Bonds returned -1.8% over the month. Ten-year yields in developed countries rose over the month as markets priced more monetary tightening.
Rising credit spreads were an additional headwind for investment grade bonds during the month, while high yield spreads declined slightly. Australian Bonds also produced a negative return, returning -1.6% over the month as yields increased. Australian Shares returned -2.5%, underperforming their overseas counterparts in February. The more defensive sectors tended to outperform, with utilities the top performer (3.4%), meanwhile sectors leveraged to the economy struggled, with materials being the worst performer (-6.7%).
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/Mercer-Funds-Monthly-Report-FEB-2023.pdfJanuary, 2023
Markets started 2023 on an optimistic note. Equities, bonds and alternatives generally rose. Rates and spreads declined and equity market volatility fell to its lowest level in almost a year. Positive market sentiment was helped by US CPI inflation falling for the sixth month in a row. It also seems to have peaked in other developed countries. Investors are still hoping for an end to the monetary tightening cycle, even if central banks remain cautious. Consumer confidence also improved over the month, as the University of Michigan consumer sentiment index unexpectedly rose to the highest level since April 2022.
Over January, Hedged Developed Markets Overseas Shares returned 6.2% on receding inflation and falling interest rates. Fundamentals were otherwise unfavorable. The first month of the 2022 Q4 earnings season yielded disappointing results from a number of companies in a quarter that could see its first decrease in earnings since 2020 Q3. Analysts still expect low single digit positive earnings growth for 2023 as a whole. Emerging markets outperformed unhedged Overseas Shares over the month, posting a 3.8% gain for the month of January as they were buoyed risk-on environment. The ongoing reopening of the Chinese economy and better than expected Q4 GDP growth benefitted the index, meanwhile India and Brazil detracted. Hedged Overseas Government Bonds returned 2.0% over the month. Ten-year yields in developed countries fell by 20-30 basis points over the month which led to positive returns for defensive fixed income.
Falling credit spreads, especially for high yield, were an additional return boost for credit. Inflation expectations in the US, as measured by the 10-year break-even rate, fell to 2.2%. Australian shares returned 6.3% and again outperformed their overseas counterparts in January, adding to the strong outperformance of the ASX300 over the last twelve months, whilst Australian bonds also produced positive returns with bond yields ending the month lower.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/Mercer-Funds-Monthly-Report-JAN-2023.pdfDecember, 2022
December was a disappointing end to a bad year for markets. Investors had few places to hide as traditional safe haven assets such as bonds fell in tandem with equities. The final month of the year saw negative returns for equities, commodities and bonds as fears that have driven negative investor sentiment for most of 2022 returned: no end in sight for monetary tightening and uncertainty over the duration and severity of the economic slowdown that started in 2022. Over December, Hedged Developed Markets Overseas Shares returned -5.2%, following two strong consecutive positive months.
For 2022 as a whole, equities had their worst year since 2008. Global equities and the S&P 500 ended the year near bear market territory (defined as a decline of more than 20%), while the NASDAQ ended the year down by over 30% in USD terms. In December, negative market sentiment returned as investor focus pivoted from favourable inflation trends towards continued monetary tightening and the ongoing economic slowdown, which earnings estimates may not yet fully reflect. Emerging markets declined to a lesser extent than Overseas and Australian shares, posting a -2.6% decline for the month of December. Weakness in India, Brazil, Taiwan and Korea were offset by strengthening Chinese share as investor sentiment improved amid the rapid reopening of its economy.
Hedged Overseas Government Bonds returned -2.2% over the month as bond yields rose across major regions as fixed income investors positioned for the continuation of monetary tightening following hawkish guidance from all major central banks over the month. Ten-year US yields rose by 13 basis points to end the month at almost 3.9%, while 30-year yields also rose by around 20 basis points to almost 4.0%. Yield movements were more substantial for Germany and the UK where 10 year yields increased by 50-60 basis points. Inflation expectations for the US, as measured by the 10-year inflation breakeven rate, fell from 2.37% to 2.30%.
Australian shares outperformed their Hedged Overseas counterparts in December. The ASX 50 was the top performing Australian index, despite declining -3.0%, meanwhile the ASX mid 50 was the worst performer, declining 4.6%. The best performing sector for the month was Materials (-1.1%) with the big miners BHP, Rio Tinto and Fortescue adding 1.1%, 7.1% and 7.1% respectively, they were also the top three positive contributors to the ASX 300. Meanwhile CBA and Transurban were the largest detractors, declining -4.9% and -8.9% respectively.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/Mercer-Funds-Monthly-Report-DEC-2022.pdfNovember, 2022
November saw equities and other growth assets maintain the positive momentum from October. The main driver of improved investor confidence in November was a better than expected US inflation reading, which strengthened hopes that monetary tightening may slow down later this year and into 2023.
However, the overall economic outlook remains soft as purchasing manager indices remaining in contraction territory, and layoffs increasing. Some regions, such as the UK and Europe, appear to be in a recession already,however, investors took this as a sign that monetary policy tightening is now taking effect, which perhaps lead to a slow down the pace of monetary tightening, along with better than expected inflation figures in the US strengthening this conviction.
Over November, Hedged Developed Markets Overseas Shares returned 5.4%, marking two strong consecutive positive months. The S&P 500 and Nasdaq indices returned 5.6% and 4.4% respectively in USD terms with the S&P 500 jumping 5.6% on the day the US CPI figure was released. The equity rally was even more noticeable outside the US. Major developed markets such as Australia, the UK and Europe enjoyed double digit returns in USD terms. Much of the outperformance was due to the sharp decline in the US dollar over the month, which sold off in a risk-on environment.
Looking forward, analysts now project a year-over-year decline in earnings for the S&P 500 in Q4 2022. Value outperformed growth during the month by a wide margin as value sectors such as industrials and financials outperformed the technology sector. Emerging markets were the best performer this month. They outperformed both Australian and Hedged Developed Markets Overseas Shares by a considerable margin. This was almost exclusively driven by a rally in Chinese equities and renminbi over rumors that Covid restrictions would be scaled back. However, later in the month additional restrictions were put in place, which led to unrest among the population. Brazilian equities declined over the month with negative sentiment around the reappointment of President da Silva.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/Mercer-Funds-Monthly-Report-NOV-2022.pdfOctober, 2022
October saw investor optimism return despite a fragile macro outlook. After two consecutive months of drawdowns across most asset classes, October saw a notable rebound in developed market equities.
Defensive fixed income saw modest declines, with the exception of Australian government bonds, while emerging market assets had negative returns driven largely by declines in Chinese equities. US GDP for Q3 showed a return to growth after modest declines earlier in the year, mainly due to higher energy exports and lower import demand. Consumer confidence bounced back but retail sales were flat. While the UK and Eurozone are facing more significant headwinds, Eurozone GDP remained positive in Q3. GDP data from China rebounded, largely driven by infrastructure investment, while the property market and consumption remain weak. Over October, Hedged Developed Markets Overseas Shares returned 7.2%. After two challenging months, further bad news for markets was limited. Another set of disappointing inflation figures implied more monetary tightening ahead, which markets have been expecting. In spite of the many headwinds, earnings as a whole have been reasonably resilient with a majority of companies who reported in October having earnings above estimates. Value outperformed growth by a wide margin as disappointing earnings for some large US tech companies led to declines in late October.
Emerging markets underperformed developed markets and ended October negative territory. This was driven by a double digit decline in Chinese equities following the broad export bans of semi-conductors and the negative perception of China’s Party Congress. Positive performance in other emerging markets did not entirely offset headwinds from China. Hedged Overseas Government Bonds returned -0.4% over the month as bond yields continued to rise in the US, but fell in Australia, the Eurozone and most notably the UK. Tenyear and 30-year yields in the US rose by 27 and 43 basis points to 4.1% and 4.2%, respectively. Ten-year government bond yields fell by 60 basis points to 3.5% in the UK. Inflation expectations for the US, as measured by the 10-year inflation breakeven rate, rose from 2.15% to 2.51%, a substantial increase but still in line with the Fed’s long-term target of 2% personal consumption expenditure (PCE). Australian shares underperformed their Hedged Overseas counterparts in October despite the ASX 300 returning 6.0%. The S&P/ASX 50 detracted with a return of 5.7%, meanwhile the S&P/ASX mid 50 lifted the index, returning 7.1%.
The best performing sector for the month was Financials (+12.1%) with the top three contributing stocks to the index for the month being CBA, Westpac and NAB. Meanwhile, Materials was the worst performing sector (-0.2%) dragged lower by BHP (-2.1%) which was the largest negative contributor.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/Mercer-Funds-Monthly-Report-OCT-2022.pdfSeptember, 2022
September 2022 left few portfolios unscathed in a major drawdown that affected a vast majority of asset classes in public markets. Equities sold off across the board, bringing major indices back into bear market territory. Fears of increased monetary policy tightening caused unrest in markets, as inflation continued to be higher than anticipated. The sell-off was broad based across sectors and regions with emerging market equities faring worse than developed markets (Unhedged). A strengthening US dollar gave some reprieve to unhedged developed markets in Australian dollar (AUD). Equity market volatility returned to the heights seen in early June.
Over September, Hedged Developed Markets Overseas Shares returned -8.9%. Investor sentiment continued to deteriorate in September, according to the latest Bank of America Fund Manager Survey. Monetary policy is priced to be tighter for longer. Earnings expectations continue to decline amid weakening business conditions. Value stocks continued to outperformed growth stocks over September, with the continued increase in interest rates.
On a sector level, healthcare was the only sector not to have a negative performance during September, while real estate and IT posted the most significant declines. Emerging markets underperformed developed markets in AUD terms. Large Asian economies such as China, Taiwan and Korea posted negative returns in mid double digits. The primary drivers were slowing global growth hitting export demand, the downturn in China’s housing market and disruptions due to Covid restrictions. Hedged Overseas Government Bonds returned -3.4 over the month as major developed bond yields rose sharply over the month. Discouraging inflation readings across the developed world made it likely that monetary tightening will continue for the foreseeable future.
Ten-year and 30-year yields rose by 68 and 52 basis points respectively in the US. The UK went through a major government bond (gilt) sell-off after its government announced a budget that markets deemed fiscally unsound. Australian shares outperformed their Hedged Overseas counterparts in August, with the ASX 300 returning -6.3%. The S&P/ASX Small Companies was the biggest detractor for the index returning -11.2%, meanwhile the S&P/ASX 50 was the greatest contributor, returning -5.4 for the month. The best performing sector for the month was Materials, returning -2.6%. Utilities (-13.8%) and Real Estate (-13.5%) were the worst performing sectors. CSL (-2.8%) was the biggest contributor to the S&P/ASX 300 over the month, meanwhile Macquarie (-13.2%) was the largest detractor.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/Mercer-Funds-Monthly-Report-SEP-2022.pdfAugust, 2022
Shares sold off in the second half of August. Poor economic data and the Federal Reserve reasserting that monetary policy will be tighter for longer were the catalysts for the move downward. Investors had been hoping for a slowdown in monetary tightening following a lower than expected inflation reading, but this appears less likely following hawkish speeches at the annual symposium in Jackson Hole.
Emerging markets proved to be a diversifier this month, providing gains when developed markets were down by 3.6%. Commodities indices were nearly flat as spot prices declined, especially oil. However, natural gas continued to increase as Europe and the UK continued to scramble to build reserves before winter. Attention shifted temporarily from the Ukraine conflict to Taiwan where visits by US government officials led to Chinese military exercises around the island and renewed concerns about military action over the island’s status. Over August, Hedged Developed Markets Overseas Shares returned -3.6%. After starting the month with optimism, a sell-off began in mid-August as negative economic data kept trickling in.
Jerome Powell’s speech in Jackson Hole late in the month accelerated the sell-off, as investors positioned for interest rates to continue to rise sharply and further slowing of the economy.Value outperformed growth for the broad market, as the most duration-heavy stocks suffered the brunt of the market’s repositioning for tighter monetary policy for longer. Emerging markets shares returned 2.2% as strong performance in Brazil and India offset weakness in East Asia, while China was close to flat.
The completion of a deal between US and Chinese regulators on audits of US listed Chinese firms was good news, but concerns remained over whether it would work in practice. Hedged Overseas Government Bonds returned -3.1% over the month as major developed bond yields rose sharply over the month. US inflation break-evens fell slightly over the month and the Federal Reserve sent a clear message not to expect a slowdown in tightening anytime soon. Ten-year yields rose between 50 and 100 basis points for the US, UK, Eurozone and Australia. The US 30-year yield rose by around 35 basis points and ended the month at almost 3.3%. The US yield curve is now inverted with two-year yields above ten-year yields. When this dynamic is sustained, it can be a leading indicator of recessions. Australian shares outperformed their Hedged Overseas counterparts in August, with the S&P/ASX 300 returning 1.2%.The S&P/ASX 50 returned 0.8% meanwhile the S&P/ASX Small Ordinaries returned 0.6%. The best performing sector for the month was Energy, returning 7.8%. Real Estate (-3.3%) and Consumer Staples (-1.7%) were the worst performing sectors. BHP (6.1%) was the biggest contributor to the S&P/ASX 300 over the month, meanwhile CBA (-1.2%) was the largest detractor.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/Mercer-Funds-Monthly-Report-AUG-2022.pdfJuly, 2022
Share markets staged a recovery rally during July despite economic data continuing to deteriorate. US GDP declined for the second consecutive quarter, marking what is by some definitions a technical recession. Earnings growth also continued to slow. The clearest catalyst for the recovery was the decline in longer term interest rates, suggesting the Federal Reserve would not have to tighten policy as much to control inflation. Globally, growth stocks outperformed value and North America was the strongest performing region.
The Chinese SSE and Hong Kong Hang Seng were the only indices with significant underperformance. Inflation continued to accelerate across the world. For the US, UK and Eurozone, inflation exceeded previous multi-decade highs even though market-based inflation expectations declined. Central banks continued their hiking cycle with interest rate increases in all major economies except Japan and China. Over July, Hedged Developed Markets Overseas Shares returned 8.0%. Declining longer term interest rates boosted sentiment despite second quarter earnings continuing to weaken with positive earnings surprises below long term averages and year-on-year earnings growth at its lowest level since 2020 Q4. Notably, the S&P 500 and Nasdaq ended the month out of bear market territory.
Emerging markets returned -1.7% as Chinese equities posted steep declines. China’s reopening last month had lifted sentiment but renewed talks of restrictions returning, including to Shanghai, dampened sentiment. In addition, further signs of China’s deeply troubled property market emerged casting doubt on China’s economic trajectory, at least in the short term. Strong returns for India and low to mid-single digit positive returns for Taiwan, Brazil and Korea helped to offset some of the losses in China. Hedged Overseas Government Bonds returned 2.3% over the month as major developed market bond yields ended the month down sharply from their highs reached at June quarter end. From previously pricing an aggressive hiking cycle, investors began to position for a meaningful slowdown, falling inflation expectations and central banks ultimately going into an easing cycle.
Ten year yields fell between 30 and 60 basis points for the US, UK, Eurozone and Australia. The Japanese 10-year yield declined by 5 basis points. High yield spreads declined sharply, supported by risk-on sentiment and elevated spreads drawing some investors to the space. Australian shares underperformed hedged overseas counterpart in July, with the ASX 300 returning 6.0%. The ASX 50 returned 4.7% meanwhile the ASX Small Ordinaries returned 11.4%. The best performing sector for the month was IT, returning 15.4%. Materials (-0.4%) and Energy (2.2%) were the worst performing sectors. CBA (11.5%) was the biggest contributor to the ASX 300 over the month, meanwhile BHP (-5.3%) was the largest detractor.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/MAM-MHCF-Retail-Factsheet-July-2022-MHCF44773.pdfJune, 2022
Equity markets sold off heavily in June after US inflation came in above expectations, which prompted the Federal Reserve to hike its overnight rate by 75 basis points. Economic data hinted at a slowdown and led to increased recession fears. Inflation for other regions such as the UK, Eurozone and Australia remained elevated and we even saw CPI exceed 2% in Japan. Commodities also sold off, as investors positioned for the possibility of commodity demand slowing if a recession were to occur. The conflict in Ukraine raged on as Russia expanded its territorial gains in eastern Ukraine. Restrictions on Russian energy imports to Europe were tightened, exacerbating the energy shortfalls there and leading to fears of rationing later in the year.
Over June, Hedged Developed Markets Overseas Shares returned -8.1%. Equity markets sold off over the month as investors started to price in an increased likelihood of recession amid persistent inflation and aggressive financial tightening that started to take its toll on the real economy. Hedged Developed Market Overseas Shares are now down 12.5% for the year. The sell-off in June was broad based with both growth and value stocks posting steep declines. Emerging markets returned -2.6%, outperforming both the US and other developed markets. China stood out as the only major equity market with strong positive returns. This was driven by optimism over China’s potential recovery from its slowdown induced by last year’s regulatory campaign and lockdowns in major cities this spring. Meanwhile monetary policy in China remains very accommodative. Other large emerging markets did poorly this month.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/Mercer-Funds-Monthly-Report-JUN-2022.pdfApril, 2022
Over April, Hedged Developed Markets Overseas Shares returned -7.4%, as equity markets sold off and volatility spiked in the worst month for the S&P 500 since March 2020. Corporate earnings are beginning to converge into single digit territory after last year’s massive rebound. Markets would normally look at policy support to ease the pain. This time though, high inflation is leaving central banks little choice but to maintain their plans to continue tightening.
Therefore, investors had little reason to remain optimistic, which was reflected in price action during the month. Unhedged Emerging Market shares returned -0.2% due to the sell-off in China as markets priced in the impact of the now far-reaching lockdowns. Taiwan and Korea did poorly as well given their economic integration with China.
Hedged Overseas Government Bonds returned -2.9% over the month. US treasury bonds saw the worst month in a decade as yields kept rising, pushing up borrowing costs across the economy. Australian bond yields followed in a similar manner with Australian government bonds returning -1.5%. Credit spreads also widened for investment grade and high yield corporate debt.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/Mercer-Funds-Monthly-Report-APR-2022.pdfFebruary, 2022
Over February, Hedged developed market overseas shares returned -2.8% with most developed and emerging markets suffering from the uncertainty brought about by the RussiaUkraine conflict. US equities, European markets and economies with heavy exposure to global trade such as Germany performed poorly in February. Australia managed to post a positive return in February due to its exposure to commodities and energy. Unhedged Emerging market shares underperformed over February returning -5.8%. The collapse of the Russian stock market and poor market performances from China and India was partially offset by Brazil’s positive performance, resulting from their natural resource exposure. The weakening of the US dollar against currencies of commodity producers, such as Australia, South Africa and Brazil, also impacted on unhedged returns.
Hedged overseas government bonds returned -1.1% over the month as 10-year government bond yields for major developed markets ended the month higher. Australian 10-year government bond yields moved in the same direction, increasing by 25bps to 2.13% and the Bloomberg Ausbond Treasury index returned -1.3% over the month. In spite of the elevated market volatility brought about by the Russia-Ukraine conflict, developed market government bonds in February did not exhibit their usual safe haven characteristics. Instead yields have continued to rise due to uncertainty around inflation and monetary policy. Spreads have risen considerably in February, with high yield and emerging market debt bearing the brunt of the Russia-Ukraine conflict. The yields on Russian hard currency debt has soared to over 25% following the imposition of sanctions, freezing of Russia’s hard currency reserves and the cutoff of major Russian banks from the SWIFT system.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/Mercer-Funds-Monthly-Report-FEB-2022.pdfDecember, 2021
The Fund has approximately 88% in growth assets and 12% in defensive assets. We regularly review the Fund’s asset allocation to look for opportunities that offer lower risk and/or higher return potential, considering valuations, macroeconomic developments and market sentiment.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/FP29-Mercer-High-Growth-Fund-Dec-2021.pdfOctober, 2021
Over October, Hedged Developed Market Overseas Shares posted strong positive returns of 5.4% with many equity indices reaching new highs. Earnings growth continues to provide support to fundamentals as we saw equity market volatility decline significantly over the month and a return to risk-on sentiment. With a majority of companies having beaten analyst expectations, investors now expect a strong fourth quarter. Chinese markets finally rebounded over the period as concerns over the Chinese property sector stabilised. However, this was not enough to offset the weaker performance across the rest of Asia and Brazil, hence the region lagged for the month with Unhedged Emerging Markets returning -2.9%. Fixed income markets were volatile over the month as markets continued to price in a faster pace of monetary policy tightening. Domestically, the third quarter CPI figures were higher than the RBA’s and broad market expectations, triggering a domestic bond sell-off and Australian 10-year government bond yields rising considerably. Consequently, Australian Government Bonds returned -3.8% over the month.
Returns for Australian Shares were muted over October, with the S&P/ASX 300 returning 0.1% and considerably underperforming Hedged Developed Market Overseas Shares. All other domestic indices provided similar returns except for the S&P/ASX Small Ordinaries, which was the best performer, returning 0.9%. IT (2.4%) was the leading sector over the period, driven by a small growth rally towards the end of the month, evidenced by the relative performance of Xero (7.5%) and Afterpay (1.5%). The worst performing sector was Industrials (-3.2%), which is heavily weighted towards travel names such as Qantas (-5.7%) and Sealink Travel (-18.0%)
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/Mercer-Funds-Monthly-Report-OCT-2021-1.pdfAugust, 2021
Over August, the number of cases associated with the COVID-19 delta variant surged, slowing down the global economic recovery as countries with low vaccination rates were forced to reintroduce lockdowns. For developed markets, indices continue to reach new record highs as earnings remained strong and highly vaccinated countries such as the UK demonstrated that it is possible to live with the virus. As such, the going concern of the virus will likely shift to supply chain constraints and high inflationary pressure rather than closed economies. Hedged Developed Market Overseas Shares returned 2.7% over the month, driven by another growth rally from the US market.
The positive market momentum was driven by the highly anticipated US Federal Reserve speech from Jerome Powell. Investor sentiment lifted as the US Federal Reserve reiterated its view that inflation is transitory and signalled that tapering will occur towards the end of this year. Unhedged Emerging Market Shares rebounded over the month, driven by strong returns from India, Taiwan and Russia. China’s performance improved from last month, but continued to lag other emerging market nations as the impact of their regulatory probe widened to affect several other industries. Incidentally, many key players from the Chinese IT sector have signalled to investors that there will likely be further regulatory action, which they plan to abide by. Australian REITs rebounded over the month, returning 6.4% and outperforming Hedged Global REITs. Results from the latest earning season revealed signs of recovery in FY21 for major REITs, with occupancy rates remaining above 98%. However, domestic lockdowns will likely hinder this recovery progress. Furthermore, as the nature of the workplace changes and flexible working arrangements continue, shifts in demand may occur and challenge the future of office REITs.
Australian Shares marginally underperformed Hedged Overseas Shares as the S&P/ASX 300 ended the month at 2.6%. All other domestic share indices provided similar positive returns with the exception of the S&P/ASX Small Ordinaries, who as the standout returned 5.0%. In contrast to the previous month, performance from the IT and Materials sector reversed. Strong performance from Afterpay (39.2%) and Wisetech (57.0%) aided IT performance (16.2%), whilst the broader drawdown for cyclical commodities negatively impacted BHP (-14.2%) and Rio Tinto (-15.6%), causing the Materials sector to lag (-6.9%).
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/Mercer-Funds-Monthly-Report-AUG-2021.pdfFebruary, 2021
Over the month of February, the economic data that was released showed mixed results and share markets were volatile. However, optimism over medium-term growth and the global economic recovery continues to outweigh short-term concerns. Falling COVID-19 cases and vaccine deployment has reduced restrictions and economies are expected to reopen soon. For developed markets, the US and UK reported solid economic growth for the final quarter of 2020. Both markets continue to provide strong fiscal support and continue to lead vaccine deployment with their aggressive rollout programs.
Globally rising government bond yields caused some volatility towards the end of the month. However, Hedged Developed Markets Overseas Shares still managed to provide a positive return of 2.7% for the month. Small Caps shares, both globally and domestically, also continued to provide positive returns. In contrast to January, Emerging Markets were the weakest performing region, returning -0.1% over February. Performance was dragged mainly by China's underperformance, caused by slowing profit growth and weak returns from the technology sector. Additionally, Brazil was also negatively impacted by policy and election concerns. The US dollar weakened against developed market currencies due to higher commodity prices and an increase in yield spreads. An increase in interest rates coupled with a risk on environment meant that investor demand for alternative investments and safe havens fell, causing Gold to fall by 7.0%. Oil prices increased by 18.1%, as a function of both rising demand from economies reopening and earlier supply cuts from Saudi Arabia. Whilst Hedged Global REITs provided positive returns over the month (+3.9%), Australian REITs continued to struggle, returning -2.5%. The Australian share market provided a positive return over February, with the S&P/ASX300 returning 1.5%. Other domestic share indices achieved similar positive performance over the month, with the standout performer being the S&P/ASX 50, which returned 2.0%. The best performing sectors were Materials (+7.1%) and Financials (+5.2%), whilst the worst performing sectors were IT and Utilities, which both returned -8.0% over the month.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/MMF-monthly-report-February-2021.pdfasset_class:
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manager_contact_details: Array
ticker: MIN0012AU
release_schedule: Monthly
structure: Managed Fund
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Mercer High Growth Fund aims to achieve a return (before management costs) that exceeds CPI increases by at least 4.5% per annum over rolling seven year periods. Investment managers Mercer selects investment managers for the Fund, drawing on our extensive research network to establish an optimal combination of specialist managers. Mercer’s investment manager research focuses on each manager’s strength in idea generation, portfolio construction, implementation and business management.
- The Fund invests in a range of primarily growth oriented assets, including shares, real assets and alternatives.
- Diversification is achieved at the asset class, manager, country, sector and security levels, with a focus on operational efficiency and sustainability.
- International assets held by the Fund may be fully hedged, partially hedged, or unhedged for fluctuations in the Australian dollar against other currencies.
- The Fund has approximately 88% in growth assets and 12% in defensive assets.