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/2021/02/134_pfp-2-1.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/2021/02/134_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/2021/02/134_pfp-12.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/2021/02/134_pfp-10.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.
December, 2022
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. The Fund’s elevated cash allocation detracted from performance over the quarter.
The Fund maintains a significant foreign exchange exposure, diversified across a number of developed and emerging market currencies. The Fund’s USD exposure detracted from relative performance over the quarter as the greenback gave back a portion of its gains over the year. The Fund has direct exposure to the USD as well as a USDCNH call option and emerging market currencies which are closely correlated. The Fund maintains its position in the Diversified Real Return Fund which continues to deliver low volatility absolute returns while retaining a relatively low correlation to equity markets.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/134_pfp-9.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 markets recovered in October as investors priced in a slower pace of central bank tightening.
• US equities (8.1%) rallied strongly as less hawkish dovish monetary policy speculation. At the same time, disappointing earnings in the US tech sector contributed to value sectors substantially outperforming growth.
• Australian equities (6.0%) rebounded underpinned by a smaller than expected policy tightening by the RBA.
• Another sharp decline for Chinese equities (-16.4%) saw emerging markets (-2.6%) significantly underperform developed markets (7.2%).
• European equities (9.1%) surged, with strong performance for Germany (9.4%) and France (8.75%). UK equities (3.0%) trailed developed markets as the recent unfunded fiscal expansion was unwound and the Bank of England temporarily ceased its tightening cycle to offer monetary support.
• The US 10-year bond yield (+28bps) continued to rise, ending the month above 4% for the first time since 2008 with the YoY rise the steepest since 1984. Elsewhere, bond yields were mixed with Australian 10-year yields falling as the RBA slowed its monetary tightening during October.
• Commodities were also mixed with energy commodities rising amid OPEC production cuts whereas materials including Iron Ore (-6%) fell on soft Chinese demand.
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 the 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 a moderation in profit growth and this is expected to continue.
• 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.
August, 2022
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 which was increased during the month. At month end, the Fund remains underweight bonds.
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 – specifically USD – contributed to outperformance during August. The Fund benefitted via direct USD exposure as well as its call option on the USD against the Chinese Yuan (CNH). The call option has performed well and continues to offer an asymmetric pay off should the authorities in China respond to their growing economic challenges by further depreciating their currency.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/134_pfp-4.pdfJuly, 2022
The Fund maintains a significant foreign exchange exposure, diversified across a number of developed and emerging market currencies. During the month the Fund’s cash allocation detracted from relative return as risk assets performed well and the US Dollar (USD) fell against the Australian Dollar (AUD). In addition, the Fund has a USD call option versus the Chinese Yuan (CNH) which has performed well and continues to offer an asymmetric pay off should the authorities in China respond to their growing economic challenges by further depreciating their currency. During the month, the rally in bonds and equities saw the Fund’s exposure to uncorrelated sources of return (market neutral equities and credit alongside the Diversified Real Return Fund) detract from relative performance. 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/2021/02/134_pfp-3.pdfApril, 2022
Tightening monetary policy, slowing growth, disrupted supply chains and increasing geopolitical tension all contribute to a very challenging outlook for financial markets. Equity valuations remain at extremes on just about all metrics -- except relative to interest rates. Meanwhile, bond yields are exposed to inflation risk and potential policy errors and could go significantly higher. Against this backdrop, the most exposed part of the market would be growth stocks, while value and quality could be expected to be much more resilient. That has proved to be the case so far this year with ‘growth’ oriented markets like the US (and particularly the tech heavy Nasdaq) underperforming significantly. At the same time, ‘value’ oriented markets like Australia and the UK (which are not directly affected by the Russia/Ukraine war) are trading close to all time highs.
During a turbulent month for financial markets, the Fund performed well, achieving a positive absolute return and substantially outperforming the benchmark as equity and fixed income markets fell – in some cases precipitously. The Fund’s stock selection across global and Australian equities performed very well during the month, significantly contributing to outperformance.
The Fund’s bias towards value sectors and securities performed well as ‘growth’ stocks, leveraged to future earnings, fell sharply during the month. Direct portfolio protection positions also contributed with the Fund’s US equity put options performing well. The Fund is marginally underweight across domestic and global 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. The Fund’s significant underweight allocation to fixed income and credit mitigated the impact of rising bond yields and widening credit spreads during the month.
For some time, the Fund has retained a substantial underweight allocation to fixed income (including credit) due to valuation concerns and a corresponding overweight cash position. The Fund’s allocation to foreign currency was a significant contributor to outperformance over the month. The US dollar (US$) rose against peers over the month and the Fund’s substantial allocation to US$ and emerging market currencies performed well. Meanwhile, the weakness of the Chinese Yuan meant a USDCNH call option performed very well over the month. The Fund maintains a significant foreign exchange exposure, diversified across a number of developed and emerging market currencies.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/134_pfp-1.pdfDecember, 2020
Australian markets performed strongly over the quarter, led by the value sectors, particularly energy and financials. The re-emergence of COVID-19 in NSW and ensuing travel restrictions did not have a significant market impact with Australian equities consolidating their November gains through the end of the year.
Australian markets benefitted from multiple domestic and international factors: - Increasing interstate mobility and reduced restrictions in Victoria in October were positive for markets while reintroduced restrictions in NSW were less impactful. - The Reserve Bank of Australia’s early November decision to further reduce the overnight cash rate and 3-year yield targets helped fuel the rally in equities and credit as discount rates were further reduced. Similarly, the introduction of a $100bn quantitative easing program was supportive for asset markets. - The economy continues to do better than was feared some months ago. In particular, the labour market is in much better shape than could have been expected due to the success of the massive Job Keeper program. - International factors such as the vaccine news and US election results benefitted domestic markets alongside global peers.
The strong rally in equities was the key driver of absolute returns over the quarter. The portfolio was able to fully participate in the rally, beginning the quarter close to benchmark allocations to Australian and global equities before increasing equity allocations to capitalise on the improving outlook. The portfolio’s foreign exchange allocation detracted from absolute performance as the Australian dollar rose against its peers over the quarter supported by higher commodity prices (including an increase in iron ore prices to new record highs).
The key contributor to outperformance was stock selection in Australian and global equities. The portfolio’s quality and value biases were rewarded by a notable rotation towards value sectors. The Fund’s allocation to direct commercial property (with exposure concentrated in industrial property) continues to perform very strongly, contributing to outperformance.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/134_pfp.pdfasset_class: Multi-Asset
asset_category: 21-40% Growth Assets - Diversified
peer_benchmark: Multi-Asset - 21-40% Diversified Index
broad_market_index: Multi-Asset Moderate Investor Index
manager_contact_details: Array
ticker: PER0077AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
https://www.perpetual.com.au/pricing-and-performance/#fund-listing-modal-PIWCGF
fund_features:
Perpetual Wholesale Conservative Growth aims to offer investors moderate medium-term growth as well as some income, while managing risk. The Fund is broadly diversified but with an emphasis on cash and fixed income. A value philosophy drives active decisions around weightings between asset classes and within asset classes.
- Seeks to deliver moderate capital growth over the medium-term whilst also paying investors a quarterly income.
- The team uses active management and a value-driven investment process to reduce risk.
- The Fund balances conservative assets like fixed income and alternatives, with exposure to equities for protection against inflation.
structure: Managed Fund