September, 2023
The September quarter saw increased volatility and weakness in financial markets as investors contended with the possibility that restrictive monetary policy settings were likely to persist for longer than initially anticipated.
- The MSCI World Total Return Index fell (-2.7%) over the quarter as investors responded negatively to central bank guidance that policy rates would stay at elevated levels for a considerable period, which sparked a significant sell off in bond markets and weighed on elevated valuations.
- US equities (-3.3%) marginally underperformed global equities reflecting high starting valuations and the sharp move higher in US long term bond yields. This weighed more heavily on long-duration equity sectors such as tech shares which comprises just half of the US sharemarket’s capitalisation.
- European equities (-4.9%) trailed the broader developed market led by a selloff Germany (-4.7%) as aggressive hikes by the ECB occurred at a time where regional growth materially slowed, thereby weighing on both valuations and earnings growth. In contrast, the UK equities (+2.2%) were the only major equity market in positive territory over the quarter, supported by its defensive index composition and a sharp depreciation in Sterling which increased the local currency value of the USD dividends paid by global companies which are listed on the LSE.
- Australian Equities (-0.7%) declined moderately, but outperformed most of its international peers supported by a depreciating currency, defensive index composition, a pause in rate hike cycle by the RBA, and our large scale immigration influx which is cushioning the economic impact of previous rate hikes on consumer spending .
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/136_pfp-3-1.pdfAugust, 2023
Global financial markets saw increased volatility in August as markets attempted to assess the impact of shifting economic growth prospects and the monetary policy path ahead.
- Global equities (-1.7%) receded in August. Markets sold off through the first three weeks of August with US equities (-1.6%) down by as much as -4% mid-month. Stronger-than-expected US data saw investors push US 10Y bond yields higher which weighed on equity market valuations. This trend partially reversed towards month end given a less hawkish tone from US Federal Reserve (The Fed) Chair Powell’s Jackson Hole address which eased investor concerns about more rate hikes from the world’s most important central bank.
- Australian equities (-0.7%) outperformed their developed market peers and experienced a relatively modest decline. The Australian reporting season was mixed with better-than-expected EPS growth offset by a large number of downward revisions to expectations. This signalled an impending contraction in total earnings underpinned by mounting cost pressures stemming from labour, rent, energy, transport, and technology expenditures weighed on operating margins. These costs, combined with a squeeze on disposable income and depleted household savings, conspire to constrain corporate pricing power and hence revenue growth.
- In contrast, Emerging markets (-4.7%) continued to underperform their developed market peers, reflecting the potent combination of slowing growth momentum in all key non-US economies, in addition to a stronger US Dollar and higher US bond yields.
- US 10-year yields (+15bps) rose sharply through the first half of the month before moderating The US yield curve, however, remains deeply inverted which has historically signalled economic challenges are ahead. Australian 10-year bonds (-3bps) remained relatively unchanged after the RBA held rates at 4.1% at its August meeting while the yield curve steepened with 2-year yields (-23bps) rallying over the month.
- Meanwhile, energy commodities rose, led by thermal Coal (+13.6%) while Iron Ore (+6.9%) also performed well, on the back of robust Chinese steel production. Gold (-1.4%) gave back a portion of recent gains, reflecting rising bond yields and a stronger US dollar.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/136_pfp-1-1.pdfJuly, 2023
Global financial markets consolidated in July following a strong first half for risk assets.
- US equities (+3.2%) rallied, outperforming the broader developed market (+2.9%). Performance during July was more broad based than recent months in contrast to the strong year-to-date returns which have been concentrated in a narrow group of large cap tech stocks. Indeed, traditional cyclical sectors including financials (+4.8%) and materials (+3.9%) outperformed most tech related sectors such as IT (+2.6%) and consumer discretionary (+2.3%).
- Meanwhile, Australian equities (+2.9%) were supported by the RBA’s decision to keep rates on hold as well as the rally in traditional value sectors such as financials, materials, and energy.
- Elsewhere, Emerging markets (+6.1%) performed strongly, led by China (+10.1%) which recovered its 2nd quarter losses, supported by regulatory easing and expectations of increased stimulus.
- In fixed interest markets, the US 10-year yields (+14bps) rose further as the US Federal Reserve (The Fed) raised rates another 25bps to 5.25%-5.5%, whereas Australian 10-yr yields rose marginally while the short end of the curve rallied as the RBA left the cash rate (4.1%) unchanged for a second meeting of the past four, which suggested that official Australian interest rates are close to peaking.
- In credit markets, both USD and EUR denominated credit rallied, as economic data which detailed resilient economic growth and falling inflation provided some optimism to investors that the odds of a US soft landing from 16 months of aggressive rate hikes were higher than previously thought.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/136_pfp-9.pdfJune, 2023
Global equity markets rallied over the quarter in response to stronger-than-expected March quarter growth in China and Europe, the Fed’s large-scale backstop for the US regional banks and the potential widespread benefit from artificial intelligence over time, all of which provided a solid foundation for the near-term macro backdrop. While this facilitated modest earnings upgrades in key markets including the US and Japan, the Q2’23 rise in regional sharemarkets was underpinned by rising valuations, defying a strong quarterly rise in real 10-yr bond yields as measures of the equity risk premia were pulled down to levels not seen since the aftermath of the tech boom.
- Japanese equities (+18.54%) surged on the back of a potent mix of reopening dynamics, a surge of inbound tourism, strong nominal income growth, a renewed focus on listed equity return on equity, and strengthening signs that the economy has finally resolved 30 years of chronic deflation. This combination of factors sparked a modest increase from foreign investor interest in the Japanese market given its attractive valuation, but most investors remain cautious having seen multiple false recovery signals for over 20 years.
- US equities (+8.74%) continued to rally strongly, dominated by the strong performance of a handful of large cap technology stocks which underpinned double-digit price growth in IT (+17.2%), consumer discretionary (+14.6%) and Communication services (+13.1%) which were more than double the returns in all other sectors.
- European equities (+4.3%) advanced as their recent recession was far milder than expected several months ago, but UK equities (-0.3%) declined as the Bank of England accelerated the pace of monetary tightening in response to a surge in wages growth and core inflation.
- Australian equities (+1.0%) continued to lag the performance of global equities given the local market’s defensive composition and heightened sensitivity to rising bond yields and falling commodity prices.
- Chinese equities (-8.9%) retreated from their Mar-23 quarter bounce as signs emerged that the reopening boom was lacking momentum amid signs of moribund activity in the construction sector, inflation approaches deflation territory, and its credit impulse turned negative.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/136_pfp-8.pdfMay, 2023
Financial markets were mixed in May following a robust start to the year across almost all asset classes (with the notable exception of commodities). This strong first half has been despite headwinds including moderating earnings growth, tightening monetary policy, a potential US treasury default, turmoil in US regional and global banks and concern over a looming credit withdrawal. While US equity performance has been wholly reliant on the positive contribution of high growth tech stocks, more traditional value markets such as Europe, the UK and Japan have also performed well.
- During May, US equities (+0.4%) ticked marginally higher, however this masked a widening gap between the performance of value stocks and sectors (-3.9%) and growth (+4.6%) led by the strong performance of the tech giants.
- Japanese equities (7.0%) were buoyed by attractive valuations, the depreciating Yen and the return of inflation after years of deflationary conditions. Meanwhile, Chinese equities (-8.2%) continued to recede from their post reopening peak as economic growth indicators weakened.
- European equities trailed the broader developed market with French stocks (-3.9%) falling sharply. The value correlated UK market (-4.9%) underperformed, reflecting the broader relative outperformance of growth stocks.
- Australian equities (-2.5%) underperformed developed markets on the back of hawkish monetary policy expectations and weakened materials demand.
- Domestic bond yields sold off over the month with 10-year yields rising 26bps to 3.6%. US (+19bps) ten-year yields also rose during the month while the short end saw elevated volatility as the fight over increasing the debt ceiling continued until the end of the month.
We continue to observe a disconnect between the strength of the US equity index returns and weakening economic indicators and corporate profits. The US equity market continues to be led by the large cap tech giants which have benefitted from moderating long term bond yields over the first half of 2023 and robust earnings results. US equities outside of the largest market cap stocks have starkly underperformed, suggesting that the market is pricing in weakening corporate profits, but this is being masked by rising valuations of a select few firms.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/136_pfp-7.pdfFebruary, 2023
There was a reversal of fortunes in equity and bond markets in February as a series of strong economic data saw a repricing of monetary policy expectations.
- US equities (-2.4%) gave back a portion of their 2023 gains mainly due to a sharp repricing of the US Federal Reserve’s (the Fed’s) rate expectations.
US equities weighed on the broader developed market index with the MSCI World (-1.5%) also falling in February.
- European Equities (+1.9%) – led by France (+2.6%) and Germany (+1.6%) – were more resilient, supported by the improving economic outlook for the region.
- Australian equities (-2.5%) were lower following a strong start to the year as rising bond yields and interest rate expectations weighted on stock valuations.
- Chinese equities (-9.9%) gave up almost all of their year-to-date gains as US-China tensions escalated and the US Dollar rallied.
- US bond yields moved higher over the month and the yield curve inversion intensified to a 4-decade high as 2-year yields spiked. Australian yields also rose, and the curve flattened as short end yields moved sharply higher.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/136_pfp-6.pdfJanuary, 2023
Markets surged in January as investors responded to moderating inflation while fears of a severe synchronised global recession diminished. US inflation continued to ease while resilient activity and falling energy costs in Europe alongside Chinese reopening contributed to the buoyancy in financial markets.
- European equities (9.9%) again led developed markets on the back of strong gains in Germany (8.7%) and France (9.6%). Falling energy prices, targeted stimulus and resilient demand have all contributed to a greatly improved outlook for the region.
- US equities (6.3%) rose as investors reacted to better-than-expected CPI and growth indicators. Lowered discount rates (as a result of falling bond yields) saw growth stocks (8.3%) outperform value (5.2%).
- Australian equities (6.2%) had their best January performance on record, despite marginally trailing the broader developed market (6.5%). Moderating inflation saw bond yields fall sharply, with 10-year yields (-50bps) rallying strongly over the month.
- Chinese equities (11.8%) continue to outperform developed markets as reopening, monetary stimulus and easing regulations fuel rising growth expectations.
- Bond yields fell globally in reaction to improving inflation print with rallies in 10-year US (-35bps), UK (-31bps) and German (-22bps) bonds. The January rally was substantially attributable to the unwinding of some of the elevated recession fears in the US and globally. The economic data were generally better than expected (more resilient growth and lower inflation).
In particular:
• The US is still on the narrow path to a soft landing.
• Europe has averted a severe recession that was widely expected just six months ago, owing to a warmer winter and a rapid recalibration of energy supplies.
• Growth prospects in China have been revised up following the reopening from COVID and policy relaxation.
December, 2022
Australia’s path to a soft landing remains more viable than the US. The RBA slowed the pace of interest rate hikes during the December quarter and minutes from the final meeting of the year revealed that the possibility of no increase was discussed for the first time this cycle. The RBA has a more potent mechanism to address household spending given highly leveraged household balance sheets and a large amount of mortgages being at variable rates which are highly sensitive to changes in the RBA’s overnight cash rate.
At the same time, the economy looks quite solid at present and stands to benefit from Chinese reopening and improved relations between Canberra and Beijing. The outlook for China has improved materially on the back of a combination of easing COVID restrictions, relaxed collateral and equity issuance standards in the property sector and stimulatory monetary policy. The abandonment of the zero-COVID policy is expected to be very supportive for economic activity following an initial surge in cases. The government also issued a series of measures intended to support the property sector which has languished since 2020, including credit support for highly leveraged housing developers, financing to ensure completion and transfer of projects, and loan assistance for home buyers. The key contributing factor to relative performance over the quarter was the Fund’s global equity stock selection. Value sectors and stocks substantially outperformed growth and the Fund’s global equity exposure was rewarded. Partially offsetting this however was the negative contribution of the Fund’s US and European put options.
At quarter end, the Fund was underweight across global and Australian equities. All equity exposures retain their long-standing quality and value bias which are expected to continue to outperform against a backdrop of rising interest rates and slowing earnings growth. During the quarter, the Fund’s US duration was increased while remaining underweight and short of benchmark duration. The Fund’s exposure to US and Australian government bonds remains partially offset by a small, short (negative) position in Japanese bonds. This position performed well over the quarter as the Bank of Japan elected to relax its yield curve control measures, precipitating a selloff in long term yields.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/136_pfp-5.pdfNovember, 2022
• Global equity markets rose in November as investors anticipated a slower pace of monetary tightening and lower terminal rates.
• US equities (5.6%) extended their October rally, pushing higher throughout the month before surging on the last trading day following dovish comments in a speech from US Federal Reserve (The Fed) chairman Jerome Powell.
• Emerging markets (11.7%) outperformed developed markets (5.7%) led by surging Chinese equities (28.4%). Hong Kong equities (26.8%) had their strongest month since 1998.
• Australian equities (6.6%) responded well to the slowing pace of rate increases from the Reserve Bank of Australia (RBA).
• European equities (9.7%) continued to rally strongly with gains from Germany (8.6%) and France (7.6%) as well as the UK (7.1%).
• The US 10-year bond yield (-38bps) rallied back below 4% on the back of below expectation October CPI print. We maintain our view of the key pressures currently weighing on the market outlook.
• Even though equity valuations have improved this year, they still remain above levels which are attractive, given the weakening earnings backdrop across most regions.
• Inflation and the tightening of monetary policy has caused a nasty bear market in government bonds and much tighter liquidity conditions.
• A slowdown in economic growth with elevated recession risks in the US and Asia and acute recession risk in Europe have contributed to a moderation in profit growth with a significant fall in profits in prospect next year.
• Growing geo-political risks in Europe due to the Russia/Ukraine war and in Asia reflecting a much more assertive China and heightened tensions over Taiwan’s future.
October, 2022
Global equity stock selection contributed to performance as value sectors and securities outperformed their growth peers with a number of US tech giants reporting underwhelming earnings. The Fund’s global equity put options detracted from relative return over the month given the strong rally across US and European shares. The Fund remains underweight equities in recognition of expensive valuations, tightening financial conditions and slowing economic growth. All equity exposures retain their long-standing quality and value bias which are expected to continue to outperform against a backdrop of rising interest rates.
The sharp selloff in bonds and the rising recession risks through the first half of 2022 have increased the attractiveness of government bonds in some markets. Over recent months, the Fund has added exposure to Australian and US duration, partially offset by partially offset by a small short (negative) position in Japanese duration. The Fund remains underweight fixed income. The Fund maintains a significant foreign exchange exposure, diversified across a number of developed and emerging market currencies. The Fund’s overweight allocation to cash detracted from relative performance during October as equity markets recovered. The Fund also maintains a USDCNH call option position offering an asymmetric pay off should the authorities in China respond to their growing economic challenges by further depreciating their currency.
The call option performed well despite the People’s Bank of China taking measures to slow the Yuan’s depreciation in the lead up to October’s Communist Party Congress. In consideration of the number of pressures weighing on financial markets, the Fund maintains its position in the Diversified Real Return Fund which is expected to deliver low volatility absolute returns while retaining a relatively low correlation to equity markets.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/136_pfp-3.pdfSeptember, 2022
Through another challenging quarter for financial markets, the Fund continued to perform well. The Fund’s defensive positioning significantly contributed to outperformance as financial markets struggled across equity bonds and credit. The Fund’s underweight equity exposure continues to mitigate the impact of falling equity markets. Net exposure to global equities was further reduced over the quarter as a result of adding put options on European and US equities. The Fund’s direct downside protection positions performed well with global equity put options contributing substantially to outperformance.
At quarter end, the Fund was underweight across global and Australian equities. All equity exposures retain their long-standing quality and value bias which are expected to continue to outperform against a backdrop of rising interest rates. Stock selection within Australian equities contributed to outperformance during the quarter.
The Fund’s underweight allocation to property contributed to outperformance as Real Estate Investment Trusts (REITs) underperformed across global and Australian markets.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/136_pfp-2.pdfAugust, 2022
Ultimately, the rally in global equity and bond markets since mid-June could not be sustained in the face of hawkish central bank rhetoric and elevated global recession risk. Notwithstanding indications that inflation has peaked in the goods sector, it is still way too high and there remains a long way to go for central banks to get it back under control.
· US equities (-4.1%) fell sharply over the final two weeks of the month after continuing to rally over the first half of August. · Australian equities (+1.2%) outperformed global peers, supported by robust corporate profit results.
· Emerging market equites (1.3%) outperformed, notwithstanding China’s ongoing issues with covid and the worsening property crisis.
· European equities (-5.1%) fell as the energy crisis intensified, while UK equities (-1.1%) were more resilient.
· Developed market bond yields rose substantially as monetary policy expectations were recalibrated yet again.
Benchmark 10-year yields in the US rose by 49 bps, Australia by 54bps and the UK rose by 93 bps to a new 8-year high.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/136_pfp-1.pdfJuly, 2022
Relative to benchmark, the Fund performed extremely strongly in the first half of this year. It was a month of reversal from the trends in many markets over the first half of 2022. Accordingly, the positioning of the Fund detracted from relative performance in July. In particular, the Fund’s underweight exposure to Australian and global equities detracted from relative return.
The Fund remains underweight equities in recognition of expensive valuations, tightening financial conditions and slowing economic growth. All equity exposures retain their long-standing quality and value bias which are expected to continue to outperform against a backdrop of rising interest rates.
During the month however, monetary policy tightening expectations moderated which saw growth stocks outperform. As a result, stock selection across Australian and global equities detracted from relative performance. The Fund’s S&P 500 put options also detracted as US equities had their strongest month since November 2020. During the month, the Fund added a call spread on the VIX index which will payoff if US equity volatility increases again. The sharp selloff in bonds and the rising recession risks through the first half of 2022 have increased the attractiveness of government bonds in some markets. During the month, the Fund’s US and Australian duration was further increased partially offset by the addition of a small short (negative) position in Japanese duration.
This adjustment was rewarded during the month as bond yields rallied. At month end, the Fund is slightly underweight bonds.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/136_pfp.pdfAugust, 2021
At the same time, inflation should moderate. High inflation prints in the US over recent months have been largely attributed to supply chain disruptions and accordingly identified as ‘transitory’. Core inflation is expected to subside from recent levels back towards 2% next year as some of these ‘one-offs’ reverse. This would be consistent with the US Federal Reserve (the Fed) achieving their objective of getting inflation up to 2% or higher on a sustained basis. Of course, there is also a risk that core inflation settles closer to 3% which would be very uncomfortable for the Fed, and therefore financial markets, with the prospect of significantly higher interest rates.
The extraordinary monetary and fiscal policy response to the COVID-19 crisis has been very successful in minimising the damage of a massive shock to the global economy. The policy response has also had a pervasive impact on the valuation and outlook for many key markets. The massive monetary expansion led by the US Federal Reserve has limited the attractiveness of defensive assets including government bonds. In addition, credit markets are distorted with spreads much tighter than would be indicated by the state of the economy and the risk of default. Finally, extraordinarily low interest rates are intensifying the hunt for yield and contributing to very expensive equity valuations. In this climate the fund remains well positioned to benefit from the continued economic recovery, while maintaining a defensive profile through its value and quality biases in equity exposures and allocation to sources of uncorrelated returns.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/179096534.pdfJuly, 2021
While global growth is still expected to be very strong through the second half of 2021, it appears that US growth has peaked and will revert towards pre-pandemic growth of 2% or less by the second half of 2022. The tailwinds that have powered the US growth story will fade as fiscal support declines – notwithstanding the Biden administration’s infrastructure plan. It is crucial to note, however, that first half economic and earnings growth in the US was exceptional. Early indicators are that US second quarter earnings results will be very robust with a majority of the companies that have already reported exceeding broker expectations. Inflation uncertainty continues to be a key theme in US markets with headline inflation above 5% and the US Federal Reserve’s (the Fed’s) preferred measure of core inflation at a 30 year high of 3.5%. High inflation prints over recent months have been attributed to ‘transitory factors’ caused by supply side bottlenecks. A lot hinges on this assessment as monetary policy settings are so extreme – our own view is that core inflation will subside from recent levels back towards 2% next year as some of these ‘one-offs’ reverse. However, with estimates expected to be well above potential growth, average core inflation will likely be somewhat higher than we previously estimated.
As a result, the Fed is likely to be successful in getting inflation up to 2% or higher. Of course, there is also a significant risk that core inflation settles closer to 3% which would be very uncomfortable for the Fed and therefore financial markets with the prospect of higher interest rates.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/176088647.pdfJune, 2021
Global equity markets continue to perform very strongly, at first led by growth stocks in 2020 (particularly the technology sector) as the US 10-year rate fell under 1%. Value stocks have taken over so far this year, but the technology behemoths (Amazon, Google, Apple, Microsoft and Facebook) are still trading at or close to record highs.
Commodity markets are very buoyant – iron ore prices are at record highs; copper prices are around the record highs of 10 years ago; and oil prices have recovered strongly after trading at negative prices in April last year. Credit spreads are very tight. For example, the spread on US high yield (or ‘junk’) debt is less than 3%. Moreover, benchmark government bond yields subsided somewhat in the June quarter, notwithstanding the spike in US inflation. As a result, government bond yields are still remarkably low with 10-year bonds in the major markets ranging from -0.17% in Germany to 0.05% in Japan and 1.5% in the US and Australia.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/174985934.pdfApril, 2021
US equities (+5.4%) rose on robust first quarter earnings results and promising growth indicators European markets were mixed with the UK (+4.1%) and France (+3.6%) performing strongly while Germany (+0.9%) lagged somewhat.
Performance in Asian markets was led by Taiwan (+7.0%) while Korea (+2.8%) and Hong Kong (+1.3%) also posted gains. Japan (-1.3%) was an outlier in the major developed markets, with a small fall in April.Australian equities (+3.6%) continued to rally, supported by rising iron ore prices and expectations of an ongoing economic recovery
Credit spreads tightened and long-term government bond yields fell modestly after the substantial increase in the March quarter
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/172235176.pdfFebruary, 2021
Equity markets performed well in February, while fixed income markets struggled. Developed markets continued to rally through the first half of the month before a significant selloff in global bonds saw equity markets correct. - US equities (+2.8%) rose on the back of strong Q4 earnings. - European markets continue to perform well with rises in the UK (+1.6%), Germany, (+2.6%) and France (+5.6%). - Asian markets also performed well with Taiwan (+5.4%) and Japan (+4.8%) leading the way while gains in Korea (+1.2%) were more modest following multiple strong months. - Australian equities (+1.5%) underperformed the broader developed market, despite robust earnings and improving macroeconomic indicators. - Credit spreads tightened on aggregate, mitigating some of the impact of rising interest rates in fixed income markets. - Global bond yields increased significantly.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/168497333.pdfasset_class:
asset_category:
peer_benchmark:
broad_market_index:
manager_contact_details: Array
ticker: PER0063AU
release_schedule: Monthly
structure: Managed Fund
commentary_block: Array
factsheet_url:
https://www.perpetual.com.au/funds/perpetual-balanced-growth-fund/?section=pricing-and-performance
Download Latest Fund Profile
fund_features:
The fund aims to provide long-term capital growth and income through investment in a diversified portfolio with an emphasis on Australian and international share investments. Provides investors with access to a diverse range of growth and income producing assets. Active management and asset allocation techniques are employed in order to further enhance the fund’s return and manage risk.