May, 2022
Recession fears continued this month as investors grapple with the effects of aggressive monetary tightening into a slowing global economy, hampered by war in Europe and lockdown in China. Starting with the US, the resilience of the consumer in the face of falling real incomes has been a positive surprise over the last year. Average weekly earnings, adjusted for inflation, have fallen for 13 consecutive months and are more than 6% off the highs reached in April 2020. It is the roughly $2.5 trillion in excess savings built up during the pandemic that has kept the spending party going, whilst also fueling the highest rate of inflation since the 1980’s. In April, real US personal consumption expenditures continued to grow at a healthy clip of 0.65% over the last month. However, the party appears to be coming to an end. The personal savings rate, which reached an all-time high of 33% at the height of the pandemic, has now fallen to its lowest level since August 2008 at just 4.4%.
Earnings for major US retailers are often seen as a bellwether of the strength of the consumer and thus the state of the US economy. Many were therefore taken aback this month when the likes of Target, Walmart and Kohls issued profit warnings on the back of both rising costs as well as a slowdown in consumer spending. The recessionary fears have been accompanied by growing calls of a ‘peak’ rate in inflation. Indeed, the latest year-on-year US CPI data showed prices grew by 8.3% in April versus 8.5% in March. However, the lower CPI number offered little relief to investors or the Fed as core inflation measures (exfood and energy) continued to accelerate. Shelter CPI, which includes rental prices and makes up roughly 30% of the CPI basket, has grown at a faster rate for 15 consecutive months. The latest data show growth of 5.1% in April 2022. In the Euro Area and the UK, ‘peak’ inflation is likely to occur much later than in the US. The UK reported inflation of 9% in April, versus 7% in March. German HICP grew by 8.7% in May versus 7.8% in April. The overall Euro Area HICP grew by 8.1% in May. The faster inflation of Germany and Britain relative to the US is of course due to a much larger energy shock. Energy prices have contributed roughly 4 percentage points to inflation in Europe versus 2 percentage points in the US.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/pyrford-international-monthly-commentary-australia-12.pdfApril, 2022
Investors continue to assess the devastating impact of war on the global economy. Inflation is at levels last seen in October 1988 (source: OECD) driven by rising energy prices and supply chain issues, prompting a costof-living crisis for households and limiting production for many businesses. Focus is now increasingly being shifted to the ‘stag’ component of stagflation. The IMF sharply repriced their growth forecasts in the latest WEO this month and project a fall in global growth from 6.1% in 2021 to 3.6% in 2022 and 2023. The 2022 forecast was a 0.8% downgrade from their January update and 1.3% lower than initially projected in October. This comes alongside increases in inflation forecasts for almost every economy. The risks are firmly to the downside and the probability of a global recession this year, although unlikely, has dramatically increased in the span of a couple months.
Among the major economies, Germany is likely to be most affected by the war in Ukraine. The IMF cut their German growth forecasts by 1.7 percentage points to 2.1% growth this year. An indication of the potential damage to the economy can be seen in the staggering increases in German producer prices. For the month of March, annual growth in the producer price index (PPI) was at a 73 year high of 30.9%, up from 25.9% in February. The fact that consumer prices have increased by ‘only’ 7.4% over the last year indicates that profit margins are under serious pressure. Consumers will eventually have to take on more of the burden, with CPI likely to hit double-digits this year. Underneath the headline PPI figures, the German Federal Statistics Office said the price of gas paid by domestic manufacturers increased 144% in March. Fertilizers increased 87.2%, wood containers 68.8% and metals 39.7%
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/pyrford-international-monthly-commentary-australia-10.pdfMarch, 2022
The fund returned 0.31% over the quarter. Since inception in June 2014, the fund has delivered 4.72% per annum. The aim of the fund is to provide a stable stream of real total returns over the long term with low absolute volatility and significant downside protection.
Positive returns were led by both our domestic equity allocation with our overseas bonds the notable detractor over the quarter. Domestic equities contributed 2.13% with our overseas equities detracting -0.67%. Whilst the Australian bonds contribution was broadly flat, overseas bonds generated a negative contribution of -1.51%. Within the domestic equity allocation Woodside Petroleum performed strongly assisted by a higher oil price, improved efficiency, and cost savings. Woodside’s production is linked to the oil price, whether through direct sales of liquid products or liquified natural gas contract prices based on the oil price.
In addition, shortages in Europe and Asia have highlighted that demand for gas will be robust for many years to come, despite the energy transition, and that is not currently reflected in the levels of investment in an industry whose assets deplete through natural operations. Computershare added following a strong performance last year. Earnings will benefit from interest rate rises globally. Computershare earns “margin” income on the flow of funds between its clients and their various counterparties. This income has been suppressed in recent years but now looks set to recover. Rio Tinto also added due to a strong recovery in the iron ore price and as progress has been made in negotiations with the Mongolian government on a copper mine.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/pyrford-international-monthly-commentary-australia-9.pdfJanuary, 2022
Global equity markets started the year with a sharp selloff led by US tech stocks. The Nasdaq 100 closed down 9.7% almost beating the worst January on record, the 9.9% fall in January 2008. The correction was likely driven by a surge in real yields as investors recalibrated expectations on the pace of monetary tightening from the Federal Reserve. Looking at the prospects ahead for 2022, we know economic growth will decelerate as fiscal and monetary support is withdrawn. The extent and pace of the drop however is highly uncertain and dependent upon several factors. The IMF highlights at least three risks in their updated World Economic Outlook (WEO), including the persistence of supply chain disruptions, higher than expected inflation and the emergence of new variants prolonging the pandemic. We can also add a spike in geopolitical risk to that list as tensions build up between Russia and Ukraine.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/pyrford-international-monthly-commentary-australia-8.pdfDecember, 2021
The fund returned 0.09% over the quarter. Since inception in June 2014, the fund has delivered 4.84% per annum. The aim of the fund is to provide a stable stream of real total returns over the long term with low absolute volatility and significant downside protection.
Strong returns were led by both our overseas equity allocations. Overseas equities contributed 0.53% though our domestic equities detracted, contributing -0.14%. Whilst the Australian bonds contribution was broadly flat, overseas bonds generated a negative contribution of -0.19%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/pyrford-international-monthly-commentary-australia-7.pdfOctober, 2021
In October, international and Australian equities performed positively, delivering +5.5% and +0.1%, respectively. The outperformance in international equities was largely driven by strong earnings results, particularly in the US. For Q3 2021, the blended earnings growth rate for the S&P was 39.1%. If 39.1% eventuates as the actual growth rate for the quarter, it will mark the third highest year-over-year earnings growth rate reported by the index since 2010. With regard to fixed interest, the sector delivered a negative result, returning -3.6% domestically and -0.1% offshore. The sell-off in fixed income markets was initially triggered by a globally led shift in sentiment around inflation and more hawkish central banks offshore, Australian rates materially underperformed other regions given the lack of liquidity and dysfunction in the market.
We continue to view growth assets as our preferred asset class, in an environment where monetary and fiscal policies remain accommodative, and inflation is rising. As such, we maintain an overall overweight bias to growth assets. We view contagion risk from the Chinese property sector as low and view the market reaction as overdone. With this in mind, we have continued to utilise a put option structure for our equity exposures in the Fund, to provide a capital buffer and manage the increased market volatility. Within the Fund’s fixed income exposure, the core allocation in investment grade credit has continued to benefit from the supportive policy environment and has delivered cash-plus returns for the Fund. In interest rate duration positioning, we took the recent increase in interest rates as an opportunity to increase the Fund’s overall interest rate duration exposure particularly in Australia
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/pyrford-international-monthly-commentary-australia-6.pdfSeptember, 2021
The fund returned 1.80% over the quarter. Since inception in June 2014, the fund has delivered 4.99% per annum. The aim of the fund is to provide a stable stream of real total returns over the long term with low absolute volatility and significant downside protection
Key Drivers & Detractors Strong returns were dominated by both our overseas bond and equity allocations with our domestic equities adding further. Overseas equities contributed 1.02% with domestic equities contributing 0.51%. Whilst the Australian bonds contribution was flat, overseas bonds generated a positive contribution of 1.07%, helped by a strengthening of the British Pound, Euro and Canadian Dollar. Overseas equities added led by Telkom Indonesia and Legal & General. Telkom Indonesia saw sequential growth across all segments in the second quarter with non-mobile growing faster than mobile. They continue to see strong traction in it fibre broadband business with steady increase in subscribers and higher revenues per subscriber as they take on dual or triple play services. Competition in mobile also eased too and is likely to remain so given the announced consolidation amongst the smaller operators. The company is also in advanced stage to list their tower subsidiary Mitratel by year end which will lead to a sizable valuation gain. Legal & General added as bond yields rose over the quarter which is seen as beneficial for insurers as investment income is enhanced.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/pyrford-international-monthly-commentary-australia-5.pdfAugust, 2021
Global equity markets rose over the month despite a sharp sell off over the middle of August led by growth and momentum. From the 19th August onwards, markets rebounded strongly with growth and quality leading the rebound. As we’ve highlighted previously, these equity market moves mirror the change in yield of the US 10-year which tightened over the middle of the month, supporting a rebound in growth and momentum. Over the month the US 10-year troughed at 1.19% and peaked at 1.36%, ending the period broadly unchanged to 1.29%. Despite the remarkable move higher in equity markets, not all is rosy. Investors have ridden the recovery from the pandemic, but clouds continue to gather on the horizon.
Key amongst concerns is the rampant nature of the Delta variant and the disparate rollout of vaccine programs with emerging and low-income economies lagging developed economies. The reopening trade that has seen the hospitality, travel, hotel and energy industries recover would suffer heavily should restrictions be reintroduced. Should global growth continue to recover, the prospect of central bank stimulus being withdrawn becomes ever more likely. Risk assets have benefitted significantly from ultra-low borrowing costs that have helped equities, and other risk assets, perform strongly. Higher rates would hit the most expensive pockets of the equity markets and long duration fixed income the hardest.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/pyrford-international-monthly-commentary-australia-4.pdfJune, 2021
The fund returned 2.91% over the quarter. Since inception in June 2014, the fund has delivered 4.91% per annum. The aim of the fund is to provide a stable stream of real total returns over the long term with low absolute volatility and significant downside protection
The debate on the possibility of a sustained inflation pick-up rumble on. Inflation collapsed during 2020 so the base-effect needs to be acknowledged. Nevertheless, there are other factors at work – ongoing supply shortages being foremost together with emerging labour supply problems. The money pumped into the global economy is chasing too few goods – classic demand-pull.
The MSCI World dividend yield has tumbled to a measly 1.65%. At the same time the price earnings ratio has leapt to 27.4x. The logic running through the market is not hard to discern: if bonds yield next to nothing and money in the bank yields nothing or even less why not buy equities which at least provide some income return.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/pyrford-international-monthly-commentary-australia-2.pdfMay, 2021
That is the question that continues to dominate markets. Central banks have been dogged in arguing the former. Richard Clarida of the Federal Reserve, for example, pointed to transitory factors such as base effects and supply chain bottlenecks that are behind the recent uptick in inflation. He expects inflation to return to 2% in 2022 and 2023. There has been little acknowledgment however of the demand side of the story.
The extravagant fiscal response in the US caused a surge in disposable income which is still 12% higher than pre-pandemic levels. Money saved in retail deposits (M2) is roughly 20% higher than last year. These factors likely explain why inflationary pressures in the US are much greater than the rest of the developed world, which also faces supply shortages and exaggerated base effects. The latest annual growth of CPI in the US was 4.2%, versus only 1.6% in the EU, 1.5% in the UK, -0.4% in Japan, 3.2% in Canada, and 1.1% in Australia.
Japan’s recovery has stalled and is now falling behind the rest of the advanced economies. This is most evident in the latest PMI numbers for May. The composite PMI increased to 63.5 in the US, 62 in the UK, 58 in Australia, 60 in Canada and 57 in the EU, all indicating expansion in both manufacturing and services sectors. Japan however, saw a contraction from 50.1 to 48.1. This corresponds with the latest GDP figure for Q1 which showed negative growth of 1.3%. The main contributor to this decline has been private consumption in services which declined 2.6% over the last quarter, whilst the country was battling its fourth wave of infections. Japan is among a few Asian
countries (Malaysia, Thailand, Nepal) that posted highs in daily new cases in May. The current state of emergency, that was declared at the beginning of the year is set to end at the end of May. The outlook rests on the pace of vaccination. Japan only started vaccinating its elderly population at the beginning of this month and has now vaccinated 6% of its total population. Sadly, this has meant further uncertainty surrounding the 2021 Olympics. Many sponsors are now calling for the games to be cancelled, which would deal a further blow to the postCovid recovery effort.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/pyrford-international-monthly-commentary-australia-1.pdfJanuary, 2021
Economic growth in 2021 looks set to be heavily dependent upon two factors: the impact and size of fiscal stimulus and the pace of the vaccine rollout. The IMF have increased their forecast for global growth this year by 0.3% to 5.5% with expectations of a ‘vaccine-powered strengthening of activity… and additional policy support in a few large economies.’ To gauge the expected divergence among the major economies we look at the current state of play with respect to these two factors. If we look at fiscal spending in response to the pandemic, the US looks to be leading the way once again.
According to the IMF’s latest Fiscal Monitor, the US has spent 16.7% of GDP compared to 16.3% for the UK, 16.2% for Australia, 15.6% for Japan, 11% for Germany, 7.7% for France and an EU average of 3.8%. Importantly, this includes spending that immediately affects the budget deficit of an economy, such as unemployment benefits, stimulus checks, tax cuts etc. It does not include government credit guarantees, or equity and loan injections, of which Europe has done more of. Even more notable is that these figures do not consider the new $1.9 trillion stimulus package recently proposed by President Biden. Although the new plan will likely be watered down once negotiations in the Senate begin, US fiscal spending since the pandemic will almost certainly be above 20% of GDP or $5 trillion! The UK has made impressive progress on the vaccine front. It has, at the time of writing, given 11.25 doses per 100 people, more than the US (7.11) and much more than Germany (2.38) and France (1.49). In fact, it is only behind Israel (49.13) and the UAE (27.95), when it comes to the proportion of its population vaccinated.
Europe’s vaccine rollout has so far been underwhelming and has resulted in a public spat between the European Commission and AstraZeneca over supply constraints. Japan and Australia are notable examples of where the vaccine rollout has not yet begun and will likely not start till the end of February. The risk, as pointed out by medical professionals is that new mutations of the virus could emerge as countries delay their vaccination programs. Indeed, it is still inconclusive whether the current vaccines are effective against the already present variants from the UK, South Africa and Brazil. While the forecasts for major economies have differed for 2021, the economic performance, based on data for Q4 of last year was weak across the board. In the US, 140,000 jobs were lost in December, the first negative payroll number since April. Unemployment remains at 6.7%, in other words, there are still 9.8 million fewer jobs relative to the start of the pandemic. Retail sales contracted for the third straight month by 1.9% in the US and 2.9% in the UK and Europe. Furthermore, PMI’s in Europe surprised to the downside indicating a double dip contraction as we start the New Year.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/pyrford-international-monthly-commentary-australia.pdfasset_class: Multi-Asset
asset_category: Real Return
peer_benchmark: Multi-Asset - Real Return Index
broad_market_index: Multi-Asset Growth Investor Index
manager_contact_details: Array
ticker: PER0728AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
Key Documents
Commentary
fund_features:
BMO Pyrford Global Absolute Return aims to provide a total return, before costs and tax, 4% or higher than the Fund’s benchmark of the Australian Consumer Price Index. The Fund seeks to provide a stable stream of real returns over the long term with low absolute volatility and significant downside protection. To achieve this, the Fund employs a global multi-asset absolute return investment strategy. This means that the Fund has the ability to move flexibly as determined by the investment manager between three asset classes globally – equities, cash and government bonds.
structure: Managed Fund