August, 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/2021/02/135_pfp-19.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/2021/02/135_pfp-18.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/2021/02/134_pfp-11.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/2021/02/135_pfp-17.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.
January, 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
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/2021/02/135_pfp-16.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 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. As global equities fell over the latter half of the month, the Fund’s allocation to uncorrelated sources of return (market neutral equities alongside the Diversified Real Return Fund) performed well, contributing to outperformance. 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/2021/02/135_pfp-14.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/2021/02/135_pfp-13.pdfJune, 2022
Financial markets continued their torrid start to the year through the June quarter. Global equity markets fell sharply in April and June, contributing to the worst first half year for equity markets in 50 years. Rampant inflation, hawkish central policy and rising recession risks all contributed to falling equity markets and rising bond yields.
• US equities (-16.1%) fell dramatically over the quarter with sharp sell-offs in April and again in June. Growth stocks (-20.9%) significantly underperformed value (-12.2%).
• UK equities (-3.7%) continued to show resilience while continental markets were more mixed with Germany (-11.3%) and France (-8.9%) seeing larger declines.
• Australian equities (-11.9%) were impacted by reduced Chinese demand for materials and accelerated monetary tightening. • Chinese equities (+4.6%) outperformed significantly, supported by the reopening of Shanghai. Chinese equities remain well below their 2021 highs following a dramatic selloff over the past 12 months.
• US 10-year bond yields peaked at just under 3.5% in June before rallying over the remaining two weeks of the quarter. Similarly, Australian 10-year yields rose to above 4% in June before falling back to 3.6%. The Bloomberg Global Aggregate Bond index remains on track for easily the worst year in its history. • Energy prices eased somewhat in June but remain high, impacted by the war in Ukraine.
• Materials (like iron ore and base metals) remain at elevated prices but fell sharply over the quarter as a result of reduced Chinese demand.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/135_pfp-12.pdfMay, 2022
Following a dramatic repricing of monetary policy expectations over the past six months, the remainder of 2022 will likely be dominated by the impact of central banks, led by the Fed, unwinding their extreme policy settings. Increasing geopolitical risks and the path of the pandemic will also be critical considerations for investors.
As a result, global economic growth is slowing and the risk of recession is increasing significantly. There are few places for conservative investors to hide. The massive monetary expansion led by the US Federal Reserve has limited the attractiveness of defensive assets including government bonds. The subsequent economic recovery and increasing inflation risk has put significant upward pressure on interest rates.
The tightening of monetary policy presents a major challenge to financial markets as liquidity is reduced and discount rates increase. Of course, geopolitical developments and the pandemic remain key risks that could also destabilise markets. In this climate the fund remains well positioned to navigate the tightening cycle and retains the capacity to add risk as valuations become more attractive.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/135_pfp-11.pdfMarch, 2022
In March, the Fed elected to increase the Fed Funds rate to the 0.25%-0.5% range. More importantly, the Fed foreshadowed a much more aggressive monetary policy tightening path over the next year leading to a substantial repricing of fixed income markets. Quantitative tightening (or selling down the Fed’s balance sheet) is also being touted as another tool to curb inflation by members of the Federal Open Market Committee. This would likely be a catalyst for further increases in bond yields and volatility in financial markets.
Following a dramatic repricing of monetary policy expectations over the past six months, the remainder of 2022 will likely be dominated by the impact of central banks, led by the Fed, unwinding their extreme policy settings. Slowing economic growth, geopolitical risks and the path of the pandemic will also be critical considerations for investors. There are few places for conservative investors to hide.
The massive monetary expansion led by the US Federal Reserve has limited the attractiveness of defensive assets including government bonds. The subsequent economic recovery and increasing inflation risk has put significant upward pressure on interest rates. The tightening of monetary policy presents a major challenge to financial markets as liquidity is reduced and discount rates increase. Of course, geopolitical developments and the pandemic remain key risks that could also destabilise markets. In this climate the fund remains well positioned to navigate the tightening cycle and retains the capacity to add risk as valuations become more attractive.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/135_pfp-10.pdfFebruary, 2022
The selloff in equities that dominated the new year, continued in February with the MSCI World falling 2.6% in the month.
- US equities (-3.0%) continued to slide in February. Persistent inflationary pressure and speculation surrounding the Federal Reserve’s (the Fed’s) response continued to contribute to the rotation from growth stocks to value.
- European markets were roiled by Russia’s invasion of Ukraine. Continental markets fell sharply towards the end of the month, including France (-4.9%) and Germany (-6.5%). The UK (+0.3%) was more resilient.
- Australian equities (+2.1%) led developed markets, supported by soaring energy prices and robust corporate profit results. February saw the ASX 200 post its best performance relative to the MSCI world in a decade.
- Similar patterns were observed in credit markets with US and European credit widening significantly while AUD spreads were more stable.
- The rise in US yields slowed in February as geopolitical tensions weighed on investor risk appetites. The US 10-year yield still rose by 5bps on persistent inflation concerns and anticipation of a rapid Fed tightening cycle. Australian 10-year yields rose 25bps over February ending the month above 2%.
- Other traditional safe-haven assets such as gold (+6.4%) performed well during February
Notwithstanding the recent geopolitical turmoil, this year will still likely be dominated by the impact of central banks beginning to unwind their extreme policy settings. The massive monetary expansion led by the US Federal Reserve has limited the attractiveness of defensive assets including government bonds. The subsequent economic recovery and increasing inflation risk has put significant upward pressure on interest rates. 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. Extraordinarily low interest rates have intensified the hunt for yield and contributing to very expensive equity valuations.
The tightening of monetary policy presents a major challenge to financial markets as liquidity is reduced and discount rates increase. Of course, geopolitical developments and the pandemic remain key risks that could also destabilise markets. In this climate the fund remains well positioned to navigate the tightening cycle, 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/2021/02/135_pfp-9.pdfJanuary, 2022
Stock selection across Australian and global equities was the most significant contributor to outperformance over the month. The Fund’s value and quality biases outperformed strongly during the month as growth sectors (most notably US tech) sold off sharply. The Fund is around benchmark weight overall in equities. All equity exposures retain their long-standing quality and value bias which significantly contributed to the defensive attributes of the Fund in January.
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. This added significantly to performance in the month. Government bonds are a very unattractive investment offering negative real yields and questionable downside protection, while credit offers a low return along with minimal valuation upside or compensation for default risk.
The Fund’s allocation to foreign denominated cash contributed to relative performance over the month as the more dovish stance of the RBA relative to the Fed, saw the Australian dollar weaken. The Fund maintains a substantial foreign exchange exposure, diversified across a number of developed and emerging market currencies. Finally, 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/2021/02/135_pfp-8.pdfDecember, 2021
In the next year, some of the extreme macroeconomic policies will be unwound in the US (and globally) as the impact of the pandemic is receding and the economy is recovering. In spite of the spread of the omicron variant, central banks tapering schedules have been accelerated. The tightening schedule for central banks – led by the Fed - has been brought forward following a string of poor inflation outcomes. This carries clear risks for financial markets. The massive monetary expansion led by the US Federal Reserve has limited the attractiveness of defensive assets including government bonds. The subsequent economic recovery and increasing inflation risk has put significant upward pressure on interest rates. 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/2021/02/135_pfp-7.pdfOctober, 2021
Global share markets performed very well through October, more than reversing the sell-off seen in September. US equities (+7.0%) led developed markets (+5.5%), supported by yet another quarter of robust company profit results. Australian equities (-0.1%) trailed as inflation concerns dominated and the market began to price in tighter monetary policy while emerging market equities (+0.9%) continue to under-perform developed markets weighed down by the poor performance of Chinese equities.
In the next year, some of the extreme macroeconomic policies will be unwound in the US (and globally) as the impact of the pandemic is receding and the economy is recovering. This carries clear risks for financial markets. The massive monetary expansion led by the US Federal Reserve has limited the attractiveness of defensive assets including government bonds. The subsequent economic recovery and increasing inflation risk has put significant upward pressure on interest rates. 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/2021/02/135_pfp-6.pdfSeptember, 2021
In fact, the past six months has been marked by a period of transition for the global economy and financial markets:
• Global economic growth remains well above trend, but has peaked and will slow significantly in the next year. • Inflation has unexpectedly vaulted higher as very strong demand growth has collided with significant supply side disruptions. • Profit growth has been stunning but, in the US, profit expectations for this year and next have levelled out. • The highly contagious delta variant has led to yet another reassessment of the likely course of the pandemic. • Global central banks have become significantly more hawkish with the US Federal Reserve (the Fed) bringing forward both the start and end date for ‘tapering’ quantitative easing (QE), the Bank of England is now expected to hike rates in coming months and the Reserve Bank of New Zealand, Norway’s central bank (Norges Bank) and some emerging market central banks (in Latin America and Europe) have already hiked 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/2021/02/135_pfp-5.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/2021/02/135_pfp-4.pdfJuly, 2021
Conversely, emerging market economic growth has been impacted by reactions to the spread of the delta variant. Additionally, Chinese equities are pricing an increasing regulatory risk as the authorities clamped down on the private education industry. Over the month, the MSCI Emerging Markets index returned -6.1% significantly underperforming the developed World index. MSCI China returned -13.8%, the largest monthly decline in nearly a decade. Domestically, the Greater Sydney lockdown as well as shorter term lockdowns in much of the rest of Australia has caused growth expectations to be revised down significantly. During the month Australian equities rose, but marginally underperformed the broader market. Meanwhile, the fall in domestic long-term yields outpaced global peers. The outlook for Australia is delicately poised given the combination of a highly contagious variant and low levels of vaccination and natural immunity. We expect the Australian economy to contract during the September quarter given tighter mobility restrictions. The lack of a massive direct fiscal stimulus program to date, suggests the recovery may be less robust as there will not be comparable accumulated savings.
Up to this point, equity and credit markets have been supported by the extraordinary monetary policy settings. With the recovery fully priced into markets, any upward shift to interest rates could negatively impact equity market valuations. Central banks went to extreme monetary policy settings when the coronavirus hit early last year with zero (or negative) policy rates in all major economies supported by massive quantitative easing (QE) programs.
While the global economic recovery is now well established, there has been very little change so far in the guidance for monetary policy from the key central banks (the Fed, the European Central Bank and the Bank of Japan). The strongest year of economic growth in many decades and a series of upside inflation surprises sits very awkwardly with current policy settings.
It is difficult to be precise about the timing of such a major change. As usual one central bank, the Fed, will dominate the narrative. For now, we are in a holding pattern awaiting more inflation data, developments on the delta variant and central bank policy decisions.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/135_pfp-3.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. And the value of negative yielding debt in the Barclays Global Aggregate Index (an index of global government and corporate investment grade debt) is still
USD14trillion or 20% of the index. • Currency markets have been marked by a weaker USD in 2020, but volatility in these markets is near 20-year lows. Perhaps one sign of distress in markets is a major correction in bitcoin in the June quarter (of 41%). Even after this correction, however, bitcoin is still up nearly 280% from a year ago!
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/135_pfp-2.pdfMay, 2021
Equity markets continued to rally through May supported by the strong economic outlook and continued vaccine rollout.
- US equities (+0.7%) rose, despite marginally trailing the broader developed market.
- France (+4.0%) led European markets from Germany (+1.9%) and the UK (+1.1%)
- Asian markets were mixed with Korea (+1.8%) and Hong Kong (+2.1%) consolidating recent gains while Japan (+0.2%) moved sideways and Taiwan (-2.8%) fell on resurgent COVID concerns.
- Australian equities (+2.3%) performed well, supported by strong economic tailwinds including a fiscally expansionary Federal budget.
- In fixed income, credit markets were quiet while global bond yields fell slightly in spite of elevated inflation concerns.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/135_pfp-1.pdfJanuary, 2021
Australian equities outperformed global peers, rising marginally over the month. The success of Australia’s response to the pandemic and improving macroeconomic growth expectations continue to support investor confidence. This saw cyclical sectors led by consumer discretionary outperform across equities and credit. Improved sentiment was also seen in 10-year high consumer confidence and robust housing data. There remain huge challenges for the Australian economy in 2021 in dealing with the COVID-19 crisis.
Two issues that stand out are first winding back the Job Keeper program without undermining the recovery and second managing the broken relationship with our most important trading partner, China. Notwithstanding these challenges - with the virus now under control again and a vaccine in prospect for 2021 - the outlook has improved significantly. The recent out-performance of value compared with growth retraced somewhat in January, supported by better than expected US technology earnings.
As a result, stock selection in Australian and global equities detracted from performance after recent strong contributions. While the rotation towards value seen in November and December was not extended through January, we remain of the view that investments in undervalued companies with strong balance sheets should out-perform in the years ahead. In recent months, the fund has reduced exposure to US equities and increased emerging markets exposure. This benefitted the portfolio in January as emerging markets outperformed. Overall, the fund is around benchmark allocations to both Australian and developed market equities. In November, exposure to emerging market equities was increased putting the overall equity weight slightly above benchmark. These exposures retain their long-standing quality and value bias which significantly contributes to the defensive attributes of the Fund. Moreover, after an extended period of under-performance, we expect a period of sustained out-performance from ‘value’ relative to ‘growth’ in the next 3 to 5 years. In addition, the fund has substantial foreign exchange exposure diversified across a number of developed and emerging market currencies.
Allocation to safe-haven currencies such as the USD and Japanese Yen contribute to the downside protection. The fund remains underweight fixed income, reflecting valuation concerns. Finally, 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/2021/02/135_pfp.pdfasset_class: Multi-Asset
asset_category: 41-60% Growth Assets - Diversified
peer_benchmark: Multi-Asset - 41-60% Diversified Index
broad_market_index: Multi-Asset Balanced Investor Index
manager_contact_details: Array
ticker: PER0114AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
https://www.perpetual.com.au/investments/pricing-and-performance?text=per0114au
Download Fund Profile
fund_features:
Perpetual Wholesale Diversified Growth Fund aims to provide long-term capital growth as well as regular income. A balanced allocation to both growth and defensive assets helps manage risk while helping to offset the impact of inflation. The Perpetual investment team focus on value and quality in their stock selection, seeking to own assets whose price is attractive relative to its return potential. The portfolio is balanced to provide long-term growth but with enough defensive assets to generate some income and reduce volatility.
structure: Managed Fund