September, 2023
Differences in the gross and net returns prior to August 2013 are attributable to fluctuating MERs on the initial SSGA seed money. In August 2013, the MER on the fund was capped at 79bps p.a. and as of July 2020 was reduced to 70bps p.a. Any net performance numbers stated here or in external materials prior to August 2013 will reflect a larger MER that is not attributable to investors going forward. Performance figures are calculated using end-of-month exit prices except for the ‘Since Inception’ return which is calculated using NAV prices for the pre 1 January 2010 period, and end-of-month exit prices thereafter, assume the reinvestment of distributions and make no allowance for tax. Net performance figures are after management and transaction costs. Gross performance figures are before management costs but after transaction costs. Past performance is not a reliable indicator of future performance. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. The calculation method for the value added returns may show rounding differences.
† Inception date is September 2009. # The value added returns may show rounding differences. *Benchmark: S&P/ASX 300 Accumulation Index, S&P/ASX 200 All Australian Accumulation Index prior to February 2013. Since inception performance and risk is calculated from 30 September 2009.
^ Standard deviation is a historical measure of the degree to which a fund's returns varied over a certain period of time. The higher the standard deviation, the greater the likelihood (and risk) that a fund’s performance will fluctuate and have greater potential for volatility; a lower standard deviation indicates past returns have been less volatile.
~ Sharpe ratio is calculated by dividing the fund’s net excess return over the risk-free rate by its standard deviation. The higher a fund’s sharpe ratio, the better its returns have been relative to the amount of investment risk it has taken
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/State_Street_Australian_Equity_Fund_Performance-1.pdfJuly, 2023
On the 22 June 2023, the CBOE Volatility Index (VIX) hit a low of 12.9, down -40% from the start of the year when it was trading at 21.7.1 The VIX is a measure of investors expectation of volatility based on S&P 500 Index options. It is a commonly accepted measure of investor fear (or in this case lack of fear). The recent decline may be suggesting investor complacency. This is important because equity markets are more vulnerable to shocks when they are not expected. Figure 1 below highlights the recent fall in the VIX. At these low levels the VIX now sits below the 25th percentile.
The possible complacency has coincided with exuberant equity markets in 2023 which has taken valuations back into the expensive zone. The price-to-earnings ratio for the MSCI World Index has moved from 14.9 to 16.9 in 2023.2 A move from the 50th percentile to the 85th percentile based on valuation levels of the last 20 years. At the same time the earnings trend has been subdued at only +1%3, leading economic indicators continue to point lower, and the risks of a global economic slowdown or recession remain ever present.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Australian_Equities_Monthly_Commentary-14.pdfJune, 2023
On the 22 June 2023, the CBOE Volatility Index (VIX) hit a low of 12.9, down -40% from the start of the year when it was trading at 21.7.1 The VIX is a measure of investors expectation of volatility based on S&P 500 Index options. It is a commonly accepted measure of investor fear (or in this case lack of fear). The recent decline may be suggesting investor complacency. This is important because equity markets are more vulnerable to shocks when they are not expected. Figure 1 below highlights the recent fall in the VIX. At these low levels the VIX now sits below the 25th percentile.
The possible complacency has coincided with exuberant equity markets in 2023 which has taken valuations back into the expensive zone. The price-to-earnings ratio for the MSCI World Index has moved from 14.9 to 16.9 in 2023.2 A move from the 50th percentile to the 85th percentile based on valuation levels of the last 20 years. At the same time the earnings trend has been subdued at only +1%3, leading economic indicators continue to point lower, and the risks of a global economic slowdown or recession remain ever present.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Australian_Equities_Monthly_Commentary-13.pdfMay, 2023
After a period of resilience, Australian earnings trends have declined in-line with global earnings trends in 2023. Figure 1 provides a 20 year perspective on the relationship between Australian and global earnings1 . The global and Australian earnings cycles are closely linked to global economic trends. The sometimes unfortunate truth for Australia is that by having an open economy with many global linkages, we can do little to avoid being impacted by these global trends. As an example, in early 2008 (highlighted in Figure 1) we observed a similar disconnect when Australian mining companies continued to see upgrades and the domestic banking sector initially appeared resilient, before surrendering to global influences.
The right hand side of Figure 1 highlights the recent changes. For most of 2022 the Australian equity market proved resilient to the earnings per share (EPS) slowdown in the developed world, maintaining EPS growth of approximately 20%. In 2022, the Australian companies exposure to iron ore, copper, oil and gas and our domestic economy were more resilient. In 2023, the outlook for financials, energy and materials has deteriorated and the 12-month EPS trend has declined to -1% as at 19 May 2023.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Australian_Equities_Monthly_Commentary-12.pdfMarch, 2023
So far the Australian equity market has been one of the best performing markets in the world and has been reasonably insulated from global markets. Figure 2 highlights the almost flat performance of the Australian S&P/ASX 300 Index, down only -0.3% compared to the MSCI World Index (-11%). It also highlights the underperformance of the US banks, the relative outperformance of the Australian banks and the positive +9% return from iron ore and steel stocks. The Australian equity market has a large concentrated weight to both iron ore and steel companies as well as the banks.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Australian_Equities_Monthly_Commentary-11.pdfFebruary, 2023
The S&P/ASX 300 Index has also given up ground in February. We have seen Australian investors favour companies with lower volatility, better valuations, higher quality and larger capitalization. Figure 3 below reports the quintile spread returns for several standard company characteristics for the S&P ASX 300 universe of stocks in February so far.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Australian_Equities_Monthly_Commentary-10.pdfDecember, 2022
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/State_Street_Australian_Equity_Fund_Performance.pdfNovember, 2022
In the last 20 years the best place to be for smaller companies has been global not local. The MSCI World Small Cap Index has generated 8.25% p.a. and has outperformed the MSCI World Index by 2.56% p.a. as well as Australian smaller companies by +2.76%.1 The index has been associated with earnings growth of 6.2% an average yield of 2.2% and an average multiple of 16.9 since Jan 2001.1 Smaller companies are known to be more volatile than larger capitalised stocks and this can be seen in both the annualized volatility and the beta of the smaller capitalized companies.
As shown in figure 2 below the MSCI World small capitalised stocks outperform the most during bull markets and underperform the most during market corrections. The cycles of both outperformance and under performance are usually a function of changing investor risk appetites as well as liquidity effects.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Australian_Equities_Monthly_Commentary-9.pdfOctober, 2022
After the MSCI World Index correction, year to date1 does the market now represent good value or is it more a value trap? From a pure valuation perspective the MSCI World Index’s price to earnings multiple is close to the 20 year average of ~15x.2 Figure 1 provides some historical perspective and includes the average Price to Earnings (PE) (~15x) as well as the average PE plus and minus 1 standard deviation.
As shown the MSCI World Index PE can move to either extreme and remain there for some time. The outlook for earnings, the interest rate environment and the investor risk preferences can all impact the valuation multiples. The two extremes in the last 20 years coincide with the Global Financial Crisis (GFC) of 2008 and the post Covid vaccine 2020 period. We started this correction from an extreme. If you believe the earnings then you can start to make a case for the valuation opportunity. Conversely if you think the market correction is more a sign of a potential earnings slow down then it could well be a value trap. So which tends to lead – prices or earnings?
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Australian_Equities_Monthly_Commentary-8.pdfSeptember, 2022
Equity investors are acutely watching developments in inflation expectations and for good reason. Figure 1 outlines the reason inflation is having such a big impact on equites. Above trend inflation results in central banks raising short term interest rates – designed to slow the economy, reduce aggregate demand and rein in inflation. Each cycle is different but it is widely accepted that rising short term interest rates operate with a lag of about 12 months.
Figure 1 below highlights in red the elements of this process that have occurred so far in this cycle. The points in black are yet to play out. So far we have not yet seen any material slowdown in global growth but leading indicators of global growth like the US (10–2 years) yield curve are suggesting this slowdown is coming. So far corporate earnings have only slowed mildly (as discussed in last month’s insight). The majority of companies have been able to pass on higher input costs while demand remains. The real test for corporates will come when demand begins to slow in coming quarters.
We have seen volatility in the equity market and we can expect more volatility. In the current inflation environment there remains increased uncertainty for the key factors in determining company valuations. From a cash flow perspective there is greater risk of lower cash flows in the next few years and greater uncertainty. In terms of the discount rate applied to those cashflows the market is expecting higher discount rates but also greater uncertainty in those interest rates which adds to equity market volatility. Year to date we have seen investors de-rate most companies but especially the longer dated growth companies and those with less certain cashflows. Conversely those with shorter dated and more certain cash flows have outperformed. This is in stark contrast to 2019 and 2020 and much of the last decade which favoured growth companies.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Australian_Equities_Monthly_Commentary-7.pdfAugust, 2022
Earnings Per Share (EPS) Correction Yet to Manifest in Global Markets With many economic indicators pointing to a slowdown most investors have been keenly watching emerging earning trends for signs of an earnings slow down or correction. In Australia we are only starting to see results for the August reporting season and it is too early to generalize but globally the majority of corporates have already reported. With the global results largely complete we can report a very minor -0.5% decline in earnings expectations for the next 12 months since 30th June. Indeed since early this year we have only seen a very modest -1.1% decline in earnings expectations for the next 12 months.
As shown in figure 1 above, the average earnings correction in the last 24 years has been a decline of -27 % on average. By historical standards the current EPS correction is either very small or may have more to play out if economic conditions deteriorate.
Figure 2 below shows the long term positive trend in EPS since 1998. The earnings have shown a positive long term trend growing at an annualized rate of 5.3% p.a. on average over the last 24 years. Also shown are the major earnings corrections that have occurred during past economic slowdowns.
If the economic slowdown does play out and we do see a corresponding earnings correction you can expect vastly different impacts across different sectors of the market. Figure 3 below looks at the major earnings corrections since 1998 and compares the earnings corrections across both defensive and cyclical sectors. The average earnings for the market as a whole was -27% but the correction for cyclical sectors was down on average -42% compared to only -15% for the defensive sectors. It would appear that defensive sectors are true to label with less earnings sensitivity to economic slowdowns.
Breaking the cyclical and defensive classification down even further we can see even greater contrasts. In Figure 4 the green bars represent the defensive sectors and the red bars the cyclical sectors. Healthcare and Consumer Staples are the standouts only correcting -3% and -7% respectively during these past earnings recessions. In contrast Financials (-37%), Materials (-57%) and Energy (-65%) have historically seen the biggest negative percentage declines in earnings expectations during economic slowdowns and earnings corrections. This is especially relevant for the Australian market as these sectors make up a large proportion of main benchmark, the S&P/ASX 300 Index and are widely held.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Australian_Equities_Monthly_Commentary-6.pdfMarch, 2022
Year to date the MSCI World Index is down -15.7%, the technology sector is down -26.5% and consumer discretionary sector down -29%.1 After such a large correction many investors are now looking for the opportunities. As shown in figure 1 interest in “market bottoms” is on trend. In this monthly note we take a closer look at the characteristics of this correction to help assess the future opportunities. The sell-off in markets has been savage but has largely been rational. As the market has sold off we have seen investors act in line with longer term preferences.
We expect investors to prefer less expensive companies and to prefer high quality proven business models and to favour companies that have improving outlooks. Year to date these investor preferences have dominated stock selection and there is little evidence of the baby been thrown out with the bathwater. Figure 2 below highlights the excess return from owning value (+18.0%), quality (+7.3%) and sentiment (+5.2%). This has also been evident in the sectors that have sold off the most, namely technology and consumer discretionary. Across those sectors investors have differentiated based on value (+13.8%), quality (+9.0%) and sentiment (+7.7%).
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Australian_Equities_Monthly_Commentary-5.pdfJanuary, 2022
The last few years have been so atypical you can be forgiven if you need a refresher on normal. In the last 3 years global equity market returns have averaged +18.4% per annum which is 3 times the average 6.1% return per annum experienced over the last 25 years. As Government and Central Bank pandemic policy settings begin to unwind investors should readjust their expectations for less bullish returns and a few bouts of volatility.
The Bottom Line – Less Bullish, More Volatility and Continued Rotation As the pandemic policy settings are unwound we should expect equity market returns to return more in line with history – think single digits with bouts of volatility. As economic activity normalises and inflation and interest rates rise we continue to see investors rotation from expensive growth to value. The most expensive parts of the market are the most vulnerable to this change in the market environment.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Australian_Equities_Monthly_Commentary-4.pdfNovember, 2021
Over the longer term all themes have had a positive contribution but in the last 12 months we have seen underperformance from all factors except quality. The biggest outlier is again the large negative return to Low beta securities down -33.6% in the last 12 months compared to the 10 year average of +7.2%. . Sentiment has historically generated the greatest investment returns in the last 10 years but has been negative in the last 12 months. Value has been negative in stark contrast to Global developed markets.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Australian_Equities_Monthly_Commentary-3.pdfOctober, 2021
The recent spike in energy prices is another headwind for the equity market. Oil is one of the biggest commodity inputs for production directly feeding into higher input costs. The majority of companies will see rising cost pressures and margin compression. Industries such as Transportation, Capital Goods, Utilities and Autos are likely to be the most negatively impacted.
The Energy sector has massively outperformed up 18% in the last 45 days. Earnings expectations have improved by 10.6% over the same period. Financials and Discretionary sectors have managed to generate positive returns but the rest have seen negative returns over this period. The MSCI World Index is also down 1.2% over this period. With reporting season just beginning in the United States it will be interesting to see if inflation continues to remain a key concern for corporate earnings and margins.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Australian_Equities_Monthly_Commentary-2.pdfJanuary, 2021
The S&P/ASX 300 Index finished the month of December 2020 up slightly +1.3% as vaccine news continued to drive the recovery. Historically, December has been a good month for Australian equities. Sector-wise, IT, Materials and Consumer Staples outperformed the most, whilst Utilities, Health Care and Industrials underperformed the most. The State Street Australian Equity Fund underperformed its benchmark during December after fees.
From a sector perspective, negative stock selection within Utilities (AGL and AusNet Services) and Metals & Mining ex Gold (lower exposure to BHP and Fortescue Metals) were key detractors. On the other hand, having an underweight to Financials and good stock picking within Discretionary added value. Year to date, the fund’s underperformance is largely attributed to our underperformance in November and December; sectors that detracted the most in 2020 were Utilities, Industrials and Real Estate.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Australian_Equities_Monthly_Commentary.pdfticker: SST0048AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
https://www.ssga.com/au/en_gb/institutional/ic/funds/state-street-australian-equity-fund-sst0048au
!!! Documents -> Insights & Resources -> MONTHLY COMMENTARY or MARKET COMMENTARY
(there’s no key observation commentary )
asset_class: Domestic Equity
asset_category: Australia Large Blend - Core / Style Neutral
peer_benchmark: Domestic Equity - Large Cap Neutral Index
broad_market_index: ASX Index 200 Index
structure: Managed Fund
manager_contact_details: Array
fund_features:
The objective of the Fund is to outperform the S&P/ASX 300 Index over rolling 5 year periods but with a lower level of variability than its benchmark. The objective of the Fund is to out perform the S&P/ASX 300 Index, before management costs, over rolling 5 year periods but with a lower level of variability.