Market Reviews

Month in Review as at April 2023

Index returns at end April 2023 (%)

Data source: Bloomberg & Financial Express. Returns greater than one year are annualised.
Commentary regarding equity indices below references performance without including the effects of currency (unless specifically stated).

Key Points

• The Australian equity market returned 1.9% in April driven by strong returns in property (+5.3%), IT (+4.8%) and Industrials (+4.5%). Materials were a clear laggard (-2.6%).
• Globally, developed markets had reasonable gains, particularly the UK’s FTSE 100 Index returning 3.4% in local currency terms.
• Asian markets fared worse with the Hang Seng Index (HKD) finishing the month down -2.4% and the CSI 300 Index (CNY) down -0.5%.

Australian equities

The S&P/ASX 200 Accumulation Index finished April with a gain of 1.9% after two negative performing months. Softer inflation figures and a pause in the RBA’s rate hikes led to strong gains in the first half of the month, while a slump in commodity prices, particularly iron ore, moderated those gains in the back half of April. Property was a key contributor (+5.3%), with I.T. (+4.8%) and Industrials (+4.5%) also performing strongly. Materials (-2.6%) was the sole detractor.

Property led all sectors for the month off the back of the RBA’s rate decision, meanwhile, slowing construction activity in China contributed to the declines in Materials stocks. Overall, domestic markets were driven by relief from inflation data and the interest rate pause, while concerns around the U.S. banking system were somewhat tempered. These factors were all conducive to a positive month for the Index.

Global equities

Global equities started with another positive month despite mounting higher interest rates. Emerging markets underperformed developed market counterparts returning 0.2% (MSCI Emerging Markets Index (AUD)) versus a 3.2% gain according to the MSCI World Ex Australia Index (AUD).

A greater proportion of earnings surprises and decreased investor expectations have buoyed the U.S. markets, coupled with an outlook for disinflation to continue. Over half of companies have now reported, with the S&P 500 Index posting a 1.6% return (in local currency terms) for the month.

UK economic data followed a similar pattern with headline inflation also falling slightly. The FTSE 100 Index was one of the top performers globally, having a gain of 3.4% (in local currency terms). This was driven by a resurgence in value stocks leading the UK index charge.

Equities across China saw a decline off the back of concerns on the economic recovery slowing down. This was reflected by the Hang Seng Index and the CSI 300 Index, returning   -2.4% and -0.5% respectively (in local currency terms) for the month. Expectations are that China’s central bank will ease policy to support weakening economic data.

Property

The S&P/ASX 200 A-REIT Accumulation Index finished +5.3% higher in the month of April as the A-REIT sector rebounded from its negative first quarter. In a global context, G-REITs (as represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) ended April +1.9% higher. The Australian Infrastructure sector (As represented by the S&P/ASX Infrastructure Index) finished +2.3% higher in line with the A-REIT sector.

The Australian residential property market experienced an increase by +0.7% Month on Month (as represented by CoreLogic’s five capital city aggregate). Sydney was the biggest riser alongside Perth (+0.6%) also performing strongly. In contrast, Darwin (-1.2%) was the only city to regress during April.

Fixed Income

In April, the bond market remained range-bound despite concerns over fallout from banking developments in March. US short-term Treasury Bills declined due to uncertainty regarding the debt ceiling with further volatility expected over the next few months.

The Australian 2-year and 10-year government bond yields were relatively unchanged, only moving up 9bps and 4bps respectively. The Bloomberg Ausbond Composite 0+ Yr Index reflected a return of 0.2% for the month. The US 2-year and 10-year Government bond yields fell by 2bps and 5bps, respectively. In the United Kingdom, GILT yields rose due to resilient activity data and inflation surprises. The 2 Year Gilt yields rose 34bps and 10 Year Gilt yields rose 22bps. During the month, higher quality fixed income delivered strong performance as spreads remained narrow despite apprehensions about the economic outlook. The Bloomberg Barclays Global Aggregate Index (AUD Hedged) returned 0.4% for the month.

Key points – Economic

• Inflation appears to have peaked but is proving sticky so central banks may have more work to do to drive it down.
• RBA maintained the cash rate at 3.6%.
• Both the FEB and ECB maintained interest rates.

Australia

The RBA maintained the cash rate at 3.6% at its April meeting. The headline consumer price index for the first three months of 2023 came in at an annual rate of 7%, in line with expectations and slower than the 7.8% of the December quarter. March’s unemployment rate was static at 3.5%, with the economy adding 72,200 jobs. Retail sales rose 0.4% in March, with food sales rising for the 13th month.

The Westpac-Melbourne Institute Index of Consumer Sentiment for April rose to 85.8, buoyed by the pause in rate hikes by the RBA. Composite PMI rose to 53 in April with the rise in services offsetting the fall in manufacturing output. The NAB business confidence index came in at -1 with confidence appearing to have stabilised albeit below long run averages with deeper negatives in retail and wholesale.

The trade surplus increased to $15.3 billion in March, above the market forecasts of $12.65 billion.

Global

Inflation appears to have peaked in April but is proving sticky. While goods inflation has come down as the covid-era shortages have largely eased, services inflation and rising wage costs are complicating issues. Central banks may have more work to do to really drive down those inflation numbers. A lengthy period of sub-par growth may be required to tame inflation, meaning a pause is more likely than an outright pivot, barring any further financial instability.

Growth has been surprisingly resilient thanks in part to a resilient consumer, tight labour markets, a mild European winter and China re-opening post Covid-19. However, growth is predicted to slow as the year progresses, with the lagged effect of rising interest rates and cost of living pressures making their way through the economy.

US

The Federal Reserve maintained the cash rate at 5.00% in its April meeting. Inflation rose 0.4% in April, matching market expectations, and bringing the annual rate to 4.9%.

The US economy grew by an annualised 1.1% in Q1 2023, slowing from a 2.6% expansion in the previous quarter and missing market expectations of 2% growth.

Non-farm payrolls added 253,000 new jobs in April, beating forecasts of 180,000. The unemployment rate edged down to 3.4% in April, better than market expectations of 3.6%.

Consumer confidence fell to a nine-month low of 101.3 in April. Retail sales fell 0.6% month-on-month in March, with the annual rate increasing 2.3%.

The S&P Global Composite PMI rose to 53.4 in April, showing a solid upturn in both services and manufacturing activity. PPI increased 0.2% in April against market expectations of a 0.3% increase, with the annual rate easing to 2.3% and below the market forecast of 2.4%.

The balance of trade deficit narrowed to US$64.2billion in March, above the expected US$63.3 billion.

Euro zone

The Eurozone economy grew slightly by 0.1% in Q1 2023 after a flat fourth quarter but missed market consensus of a 0.2% expansion. The surge in consumer prices was due to the higher cost of energy and food, alongside the fastest pace of policy tightening by the European Central Bank in over 20 years and weakening confidence have taken a toll on the bloc’s economy.

The annual inflation rate came in at 7.0% in April, above the expected 6.9%, signaling that inflationary pressure remains high in Europe. Unemployment dipped slightly to 6.5% in March against expectations of 6.6%.

Consumer confidence increased 1.6 points to -17.5 in April. Retail sales dropped 1.2% in March, well below the forecast -0.1%. The annual rate came in at -3.8%, the biggest decline since January 2021.

The Composite PMI rose 54.1 in April, solely supported by an increase in services activity. PPI dropped 1.6% in March, slightly less than the expected 1.7% decrease, with the annual rate easing to 5.9% as expected.

UK

An unexpected 0.3% contraction in GDP in March sees the UK at the bottom of the G7 growth league behind Germany, France and the US. Strong growth in January meant the economy grew by 0.1% over the first quarter but was unable to prevent the UK economy being 0.5% smaller than it was in 2019 before the Covid-19 pandemic.

The UK will face a difficult situation going into the summer, with millions of households finding that lower gas prices will be offset by higher income taxes and a rise in mortgage costs.

Inflation unexpectedly rose 0.8% in March, bringing the annual rate to 10.1% and above the expected 9.8%. The rate remains above the 10% mark for a seventh consecutive period and the Bank of England’s 2% target for almost two years, suggesting policymakers might continue to raise borrowing costs further to rein in inflation.

Consumer confidence rose to -30 in April, exceeding expectations of -35. Annual retail sales fell 3.1%, matching market expectations.

The composite PMI index rose to 54.9 in April driven by services growth. Manufacturing contracted for the ninth month in a row.

PPI increased 0.1% in March, compared to the market expectations of a 0.1% decrease, with the annual rate easing to 8.7%, slightly below the anticipated 8.8%.

China

The Chinese economy grew by 2.2% on a seasonally adjusted basis in the three months to March, picking up from an upwardly revised 0.6% growth in the fourth quarter and matching market forecasts. The annual inflation rate fell to 0.1% in April, lower than the market estimate of 0.4%.

The unemployment rate declined to a seven-month low of 5.3% in March. Retail sales for March increased 10.6%, exceeding market forecasts of 7.4%.

Composite PMI declined to a three-month low of 53.6 in April, with both services and manufacturing noting softer rises in output than the previous month.

Asia region

The Bank of Japan maintained its key short terms interest rate at -0.1% at its April meeting. The bank also slashed its FY 2023 GDP outlook to 1.4% from 1.7%.

Inflation increased 0.3% month on month with the annual rate dropping slightly to 3.2% in March.

The unemployment rate rose to 2.8% in March, above the expected 2.5%.

The consumer confidence index rose to 35.4 in April, well above the market forecast of 32, as household sentiment strengthened across all indices. Retail sales in Japan increased 0.6% in March, with the annual rate rising 7.2%, exceeding the market forecast of 5.8%.

The Composite PMI was unchanged at 52.9 in April, with strong services growth offset by a sharp fall in manufacturing output.

Currencies

The Australian dollar (AUD) fell for the third consecutive month in April, closing -0.8% lower in trade weighted terms to 59.8 and depreciated relative to three of the four major currencies referenced in this update.

April’s trading range of the AUD/USD pair remained narrow at just 2.3 cents over the month, similar to the 2.2 cent range observed in March. Volatility throughout the month was primarily influenced by the RBA rate hike pause in April, in addition to strong domestic labour market reporting and weaker than expected CPI data released for the quarter.

Relative to the AUD, the Pound Sterling (GBP) led the pack in March, appreciating by 2.8%. Conversely, the Japanese Yen (JPY) was the laggard of the month, falling by 1.6% relative to the AUD. Year-on-year, the AUD remains behind the Euro (EUR), US dollar (USD), GBP and JPY by -10.3%, -6.3%, -6.2% and -1.6% respectively and is down -5.2% in trade weighted terms.

Important notice: This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL No.421445 (Lonsec).

Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “General

Advice” (as defined in the Corporations Act 2001(Cth)) and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (‘financial circumstances’) of any particular person. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, redeem or sell the relevant financial product(s).

Copyright © 2023 Lonsec Research Pty Ltd (ABN 11 151 658 561, AFSL No. 421445) (Lonsec). This report is subject to copyright of Lonsec. Except for the temporary copy held in a computer’s cache and a single permanent copy for your personal reference or other than as permitted under the Copyright Act 1968 (Cth), no part of this report may, in any form or by any means (electronic, mechanical, micro-copying, photocopying, recording or otherwise), be reproduced, stored or transmitted without the prior written permission of Lonsec. This report may also contain third party supplied material that is subject to copyright. Any such material is the intellectual property of that third party or its content providers. The same restrictions applying above to Lonsec copyrighted material, applies to such third party content.

Sherlock Wealth Pty Ltd is a Corporate Authorised Representative of Matrix Planning Solutions Pty Ltd AFSL & ACL No. 238256, ABN 45 087 470 200.

Month in Review as at March 2023

Index returns at end March 2023 (%)

Data source: Bloomberg & Financial Express. Returns greater than one year are annualised.
Commentary regarding equity indices below references performance without including the effects of currency (unless specifically stated)

Key Points

• Australian equity market was down in March with S&P/ASX 200 Index returning -0.2% driven by banking contagion fears.
• Globally, developed markets recovered following the expectation of monetary easing with the S&P 500 Index (USD) gaining 7% and the FTSE Eurotop 100 Index (EUR) returning 1.0%.
• In Asia the Hang Seng Index (HKD) generated a return of 3.5%, while the CSI 300 Index (CNY) finished -0.5%.

Australian equities

The month of March ended with the S&P/ASX 200 Accumulation Index down -0.2%. The primary driver was the uncertainty arising from bank failures in the US and Europe. This, coupled with high, albeit easing, inflation added to investors’ uncertain market sentiment. The Materials sector (+5.9%) rebounded with Communications (+3.4%) also performing strongly while the Property (-6.8%) and Financials ex-Property (- 4.9%) sectors were the worst performers. Over the quarter, Consumer Discretionary (+11.4%) was the best performing sector.

Materials led all sectors for the month, reaping the benefits of higher commodity prices. The Property sector sold off following concerns around commercial real estate valuations, which stemmed from investor sentiment around higher interest rates and macroeconomic headwinds. Meanwhile, the collapse of major overseas banks led to selloffs within the Financials ex-Property sector. Overall, investors grappled with the inflation-driven interest rate outlook facing central banks globally and its implications on future economic outlook.

Global equities

Global equities rallied after a sharp initial decline for the month, led by volatility across the Financial Services sector, notably Silicon Valley Bank and Credit Suisse. This was alleviated with expectations of potential easing in central bank tightening via the US Fed’s dovish outlook commentary for the year. Emerging markets performed similarly to developed market counterparts returning 3.7% (MSCI Emerging Markets Index) and 3.9% (represented by the MSCI World Ex Australia Index) in Australian dollar terms, respectively.

Investor confidence was maintained as relatively positive, with global macro data continuing to the upside. Mixed performance was seen across Asia, with China posting fresh economic stimulus geared towards growth, as well as varied reception to the Fed’s dovish comments. This was reflected by the Hang Seng Index and the CSI 300 Index, returning 3.5% and -0.5%, respectively (in local currency terms) for the month. In the US, indications of no further rate rise lead the rebound, with the S&P500 Index posting a monthly return of 3.7%

Over in Germany, the DAX 30 Index reported a gain of 1.7% for the month (in local currency terms) after posting decreasing manufacturing data indicating further weakness ahead, which was shared by the rest of the continent with the FTSE Eurotop 100 Index reporting similar returns of 1.0% (in local currency terms) for the month.

Property

The S&P/ASX 200 A-REIT Accumulation index continued to fall in March after selling off in February, with the index finishing the month –6.8% lower. Global real estate equities (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) also regressed, returning -3.6% for the month. Australian infrastructure continued its positive momentum during March, with the S&P/ASX Infrastructure Index TR advancing 0.3% for the month.

March was relatively quiet across the A-REITs sector. Some activity includes Centuria Capital Group (ASX: CNI) announcing the acquisition of a NSW glasshouse. The deal is worth $323m and is an addition to their agriculture fund which has seen rapid growth since inception. This acquisition increases the group’s total agriculture AUM to over $500m and cements Centuria as Australia’s biggest large-scale glasshouse landlord.

The Australian residential property market increased by 0.8% month on month in March represented by Core Logic’s five capital city aggregate. Sydney (+1.4%) and Melbourne (+0.6%) were the best performers whilst Adelaide (-0.1%) was the only city to regress during March.

Fixed Income

At the start of March, the RBA raised the cash rate target by 25bps to 3.6%, stating global inflation remains high and is expected to take some time before it returns to target rates, while growth in the Australian economy has slowed and is expected to be below trend. However, uncertainty within the global financial sector was reflected across the Australian 2- and 10-year Government bond yields which fell by 70bps and 56bps, respectively. Australian fixed income performed strongly during the month with the Bloomberg Ausbond Composite 0+ Yr Index returning 3.2%.

Globally, markets were jolted by the financial sector woes in the US and Europe, which significantly impacted financial conditions and bond yields during the month. A California-based regional bank (SVB) failed, leading to the second biggest US bank failure in history, and a further two regional banks went into administration.

Over in Europe, UBS’s takeover of Credit Suisse caused turmoil in bond markets, with Swiss authorities allowing Credit Suisse’s riskiest bonds to be wiped out, and equity holders receiving a small amount of equity in UBS as part of the transaction. The US 2- and 10- year Government bond yields fell by 80bps and 45bps, respectively. The Fed continued to raise rates for the ninth consecutive time to 4.75%-5%, demonstrating their commitment to ending the inflation problem despite the banking crisis. In the United Kingdom, GILT yields followed the US, as 2- and 10-Year Gilt yields fell 60bps and 22bps, respectively.

Key points

• Central banks moved swiftly to avoid banking collapse with Credit Suisse bought out by UBS and emergency cash provided to several US banks.
• RBA increased the cash rate by 25%, taking it to 3.6%.
• Both the Fed and ECB raised interest rates in response to persistently high inflation.

Australia

The RBA increased the cash rate by 25bps at its March meeting, bringing the rate to 3.6%. The annual inflation rate slowed to 6.8% in February, led by smaller rises for fuel and housing, adding to evidence that the worst of the price increases has passed.

February’s unemployment rate was 3.5%, against expectations of 3.6%, with the economy adding 64,600 jobs. Retail sales rose 0.2% in February, suggesting that retail turnover has levelled out after the volatility of the previous three months.

The Westpac-Melbourne Institute Index of Consumer Sentiment for March was unchanged at 78.5 with areas of most concern being inflation, interest rates and the general economy. Composite PMI fell to 48.5 in March as manufacturing and service sectors recorded declines in activities that led to a broad deterioration in private sector output. The NAB business confidence index came in at 16 in March, well above its long-run average.

The trade surplus increased to $13.9 billion in February, above the market forecasts of $11.1billion.

Global

March was tumultuous month for markets as several small/mid-sized banks in the US shut down and depositors redeemed their money as questions about the viability of these banks gained momentum. This was followed by one of the cornerstone establishments of Swiss banking, Credit Suisse,  being bought out by UBS to avoid a banking collapse and possible contagion across the global banking sector.

While these bank failures may have bought back memories of the GFC of 2008, the sector as a whole has significantly de-risked since 2008, notably in terms of increased Tier 1 capital ratios. Central banks also quickly stepped in with the provision of emergency cash, which seemed to settle markets.

US

The Federal Reserve raised the cash rate by 25bps to 5.00% in March as inflation remained elevated. Inflation came in 0.1% higher for March, against expectations of 0.3%, bringing the annual rate to 5.0%.

Non-farm payrolls added 36,000 new jobs in March. The unemployment rate edged down to 3.5% in March, better than market expectations of 3.6%.

Consumer confidence increased in February to 104.2 but remains below the average seen last year. Retail sales fell 0.4% month-on-month in February, more than the expected 0.3% fall.

The S&P Global Composite PMI rose to 52.3 in March, showing a modest rise in business activity mainly led by a steeper increase in service sector output. PPI dropped 0.1%in February against market expectations of a 0.3% increase, with the annual rate easing to 4.6% and missing the market forecast of 5.4%.

Balance of trade deficit widened to US$70.5 billion in February, above the expected US$69 billion.

Euro zone

The ECB increased the cash rate by 50bps to 3.5% in its March meeting as inflation is projected to remain too high for too long. The ECB released revised inflation forecasts and now see inflation averaging 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025, with underlying price pressures remaining strong.

The annual inflation rate came in at 6.9% in March below the expected 7.1%, signaling that inflationary pressure remains high in Europe. Unemployment remained steady at 6.6% in February against expectations of 6.7%.

Consumer confidence edged down to -19.2 in March as consumers were less positive about the economy. Retail sales dropped 0.8% in February, matching market expectations, with the annual rate coming in at -3.0%. January’s unemployment rate came in at a record low of 6.6%, slightly below market expectations of 6.7%.

The Composite PMI rose to 53.7 in March, helped by the strongest increase in service sector activity in 10 months. PPI dropped 0.5% % in February, more than the expected -0.3% decrease, with the annual rate easing to 13.2% below the anticipated 13.3%.

UK

The Bank of England raised rates by 25bps to 4.25% in March, on the back of persistently high inflations. GDP posted a 0.1% increase in 4Q22, expanding on the 0.1% decline in the prior month whilst the annual rate came in at 0.6%.

Inflation unexpectedly rose 1.1% in February, bringing the annual rate to 10.4%, well above the expected 9.9%. This jump was largely due to surging food price inflation which is running at 18%.

Consumer confidence rose to -36 in March, matching market expectations. The annual retail sales rate rose 5.1%, well ahead of the 12-month average of 2.6%. in March, buoyed by Mother’s Day spending.

The composite PMI index fell dropped to 52.2 in March, supported by increased output in both the manufacturing and service sectors.

PPI fell 0.3% in February, missing the market expectations of a 0.2% rise, with the annual rate easing to 12.1%, slightly below the anticipated 12.4%.

China

The Chinese government set a growth target of 5% for 2023, which it acknowledges will not be easy to achieve. The country’s economic rebound remained uneven in March with the services sector seeing a strong recovery but the manufacturing sector losing momentum amid still-weak export orders. The annual inflation rate unexpectedly came in at 0.7% in March 2023, compared with market consensus of 1.0%.

The unemployment rate increased to 5.6% in February. Retail sales expanded 3.5% from the prior year in combined figures for January-February 2023, matching market consensus and shifting from a 1.8% fall in December.

Composite PMI increased to 54.5 in March, the third straight period of growth in private sector activity and the strongest pace since last June amid the removal of strict pandemic measures.

Asia region

The Bank of Japan maintained its key short terms interest rate at -0.1% at its March meeting.

Inflation decreased 0.6% month on month and to 3.3% annually in February, the lowest rate since last September as fuel and electricity charges dropped for the first time since May 2021.

The unemployment rate unexpectedly rose to 2.6% in February, above the 2.4% forecast.

The consumer confidence index rose to 33.9 in March, above market forecast of 31.9, as households’ sentiment strengthened across all indices. Retail Sales in Japan decreased 4.4% in February, with the annual rate rising 6.6%, exceeding the market expectation of 5.8%.

The Composite PMI rose to 52.9 in March, the steepest pace in activity since June 2022, reflecting the dissipating impact of the pandemic.

Currencies

The Australian dollar (AUD) continued to descend over the month of March, closing -1.8% lower in trade weighted terms to 60.3. The AUD depreciated relative to all four major currencies referenced in this update.

The trading range of the AUD/USD tightened over March after being elevated for the first two months of the year. Volatility continued to be dominated by global central bank interest rate policy and inflation indicators, in addition to the emergence of a potential banking crisis with the collapse of Silicon Valley Bank (SVB).

Relative to the AUD, the Japanese Yen (JPY) led the pack in March, appreciating by 3.2%. Conversely, the US dollar (USD) was the laggard of the month, albeit with a positive relative return of 1.0% relative to the AUD. Year-on-year, the AUD is now weaker than the USD, Euro (EUR), Pound Sterling (GBP) and JPY by – 10.8%, -8.8%, -5.0% and -2.6%, respectively.

Important notice: This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL No.421445 (Lonsec).

Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “General

Advice” (as defined in the Corporations Act 2001(Cth)) and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (‘financial circumstances’) of any particular person. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, redeem or sell the relevant financial product(s).

Copyright © 2023 Lonsec Research Pty Ltd (ABN 11 151 658 561, AFSL No. 421445) (Lonsec). This report is subject to copyright of Lonsec. Except for the temporary copy held in a computer’s cache and a single permanent copy for your personal reference or other than as permitted under the Copyright Act 1968 (Cth), no part of this report may, in any form or by any means (electronic, mechanical, micro-copying, photocopying, recording or otherwise), be reproduced, stored or transmitted without the prior written permission of Lonsec. This report may also contain third party supplied material that is subject to copyright. Any such material is the intellectual property of that third party or its content providers. The same restrictions applying above to Lonsec copyrighted material, applies to such third party content.

Sherlock Wealth Pty Ltd is a Corporate Authorised Representative of Matrix Planning Solutions Pty Ltd AFSL & ACL No. 238256, ABN 45 087 470 200.

Month in Review as at February 2023

Index returns at end February 2023 (%)

Data source: Bloomberg & Financial Express. Returns greater than one year are annualised.
Commentary regarding equity indices below references performance without including the effects of currency (unless specifically stated).

Key Points

• Equity markets had a challenging month with Australia’s S&P/ASX 200 Index retracing by 2.5%.
• Developed markets were slightly mixed with the S&P 500 Index (USD) returning -2.4% and European markets faring better, the FTSE Eurotop 100 Index (EUR) returning 1.5%.
• Asian markets suffered strong losses with the Hang Seng Index (HKD) finishing down -9.4% and the CSI 300 Index (CNY) down -2.1% following last month’s strong returns.

Australian equities

The month of February saw the S&P/ASX 200 Accumulation Index finish negatively after its strongest month on record in January. The main driver of the negative performance was the persistently high CPI figures in the US and the evaluation of earnings season in the Australian market. The Utilities (+3.4%) and Information Technology (+2.7%) were the top performers, whilst the Materials (-6.6%) and Financials (-3.1%) sectors were the biggest laggards in the month.

The Utilities and Information Technology sectors led all sectors as several companies reported robust earnings or positive corporate actions (i.e. Origin Energy). In contrast, the Materials and Financials sectors were the worst performers as concerns around the global macroeconomic outlook and policy response, coupled with the evaluation of earnings reports resulted in selloffs within these sectors. Investors continued to grapple with the inflation-driven interest rate outlook facing central banks globally and the implications that this may have on the future economic outlook.

Global equities

Resilient economic data in February resulted in a rise in bond yields and a decrease in equity markets. With renewed inflation concerns, US equities stumbled with the S&P500 declining 2.4% during the month.

The European Central Bank, Bank of England, and Federal Reserve announced rate hikes at the beginning of the month. The overall message from their accompanying statements was that inflation remains excessively high despite recent declines and that central banks must continue their efforts.

Economic data suggesting a postponed recession prompted investors to adjust their forecasts for the peak in interest rates and future rate cuts, given the potential lengthier route to target inflation.

Despite the typical positive correlation between robust economic data and stock market performance, equity markets had priced in anticipated rate cuts and were more dismayed by the possibility of reduced monetary easing than they were encouraged by the delayed recession.

Across the globe, a rebound of consumer confidence helped the Eurozone stay positive with the FTSE 100 returning 1.8% and the DAX 30 returning 1.6%, while the Hang Seng Index fell 9.9% driven by escalating geopolitical tensions.

Property

The S&P/ASX 200 A-REIT Accumulation index sold off in February after a strong start to the calendar year in January, with the index finishing the month -0.4% lower. Global real estate equities (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) also regressed, returning -3.6% for the month. Australian infrastructure performed well during February, with the S&P/ASX Infrastructure Index TR advancing 1.9% for the month.

February was relatively quiet across the A-REIT sector. Some activity includes Centuria Industrial REIT (ASX: CIP) settling a $300mn convertible bond raising. The move enables CIP to secure debt at 3.45-3.95% while the cost of bank debt is 5.5%. The funds raised through this effort will primarily be used to pay off existing debts and for general corporate purposes.

The Australian residential property market experienced no change (0%) month on month in January represented by Core Logic’s five capital city aggregate. Melbourne (- 0.4%) and Brisbane (-0.4%) were the worst performers whilst Sydney (+0.3%) advanced during the month for the first time in twelve months.

Fixed Income

In a continued bid to reduce inflation to target levels, the Reserve Bank of Australia has raised the cash rate for a ninth month in a row, with a 25 bps increase announced in February. This brings the current February cash rate to 3.35%. Meeting minutes noted uncertain global outlook, upward surprises on inflation and wages, and the substantial increases in rates so far.

The bond market reflected the rate rise with yields rising over the course of the month. Australian 2Yr and 10Yr Govt Bond yields rose by 49 bps and 30bps, respectively, leading to the Bloomberg AusBond Composite 0+ Yr Index to return -1.3% over the month. The Australian CPI inflation over the year to December 2022 was 7.8%. Globally, fixed income markets were much the same. The US. Federal Reserve announced another 25bps rate rise on February 1, bringing the target cash rate to 4.5%-4.75%. US 2Yr and 10Yr Bond yields rose by 41bps and 69bps respectively. Similarly, U.K. 2Yr and 10Yrs Gilt yields rose by 61bps and 37bps, respectively, following the BoE decision to raise the Bank Rate by 50bps.

Key points

• This month marked the first anniversary of the Russian invasion of Ukraine.
• RBA increased the cash rate by 25%, taking it to 3.35%.
• Both the Fed and ECB raised interest rates in response to persistently high inflation.

Australia

The RBA increased the cash rate by 25bps at its February meeting, bring the rate to 3.5%. Annual inflation eased to 7.4% in January, below the predicted 8.1%, suggesting that inflation has peaked as the economy absorbs the record run of interest rate rises. The economy expanded 0.5% in the December quarter, below the anticipated 0.8%, with annualised GDP growth at 2.7%.

The unemployment rate rose to 3.7% in January, above the market estimate of 3.5%. Retail sales rose 1.9%% in January, above the 1.5% estimate, bouncing back from the nearly 4% fall in December.

The Westpac-Melbourne Institute Index of Consumer Sentiment for February fell to 78.5% as cost of living pressures and interest rate rises continue to weigh heavily. Composite PMI rose to 50.6 in February, returning to expansion after four months of contraction, supported by services activity growth. The NAB business confidence index rose 6 points to 6 in January, approaching its long-run average.

The trade surplus narrowed to $11.7 billion in January, below the market forecasts of $12.5 billion.

Global

February marked the first anniversary of the Russian invasion of Ukraine, with many nations providing military and humanitarian aid to Ukraine. Sanctions were also applied to Russia, which caused supply chain disruptions, especially in the energy sector.

The OECD updated its 2023 outlook, saying the global outlook is slightly better as food and energy prices are substantially lower than at their peaks. Inflation remains a risk, but the organisation expects central banks to continue to monitor this and adjust decisions.

US

The Federal Reserve raise the cash rate by 25bps to 4.75% in February, dialling back the size of the increase for a second straight meeting but still pushing borrowing costs to the highest since 2007.

Non-farm payrolls unexpectedly added 311,000 new jobs in February, well ahead of the 205,000 market forecast, led by gains in leisure and hospitality, retail and profession and business services. The unemployment rate rose to 3.6%, above market expectations of 3.4%.

Consumer confidence came in at 102.9 in February, against the revised reading of 106 in January. Retail sales jumped 3.0% month-on-month in January greater than the expected 1.8% increased, showing consumer spending remains robust after a slowdown last year, amid a strong labour market, wage growth and signs of easing inflationary pressures.

The S&P Global Composite PMI rose to 50.1 in February indicating a broadly stable levels if business in private sector firms. PPI increased 0.7% in January, above the forecast 0.4%with the annual rate increasing to 6.0%. Although this is the lowest number since March 2021, it is above the market forecast of 5.4%.

Balance of trade deficit widened to US$68.3 billion, below expectations and slightly weaker on the December revised result.

Euro zone

The ECB increased the cash rate by 50bps to 3.0% in its February meeting. Markets fully priced in this increase, with a chance of a similar hike to be delivered in May, after several policymakers backed the idea that rates will have to rise higher and stay higher for some time to bring inflation back to target.

The annual inflation rate came in at 8.5% in February above the expected 8.2%, signalling that inflationary pressure remains high in Europe.

Consumer confidence rose to -19 in February on expectations that inflation has slowed as the energy crises eased thanks to mild weather and the region would be able to avoid a recession this year. Retail sales posted a 0.3% increase in January, below market expectations and after a revised -1.7% in December, with the annual rate coming in at -2.3%. January’s unemployment rate came in at 6.7%, unchanged from December and above the market forecast of 6.6%.

The Composite PMI rose to 52.0 in February, pointing to further expansion in private sector business activity, With services activity the principal driver in this upturn.

PPI fell -2.8% in January, more than the expected -0.3% decrease, with the annual rate easing sharply to 15.0% well below the anticipated17.7%.

UK

The Bank of England raised rates by 50bps to 4.0% in February, pushing rates to the highest levels since late 2008 as the it tries to combat high inflation. Inflation eased to 10.1% in January, Below the market forecast of 10.3%. The Bank believes inflation has peaked and projects it to fall to around 8.0%t by mid-2023, and to around 4.0% towards the end of the year. Consumer confidence rose to -38 in February, well above market estimates of -43 and the highest reading in nine months. Retail sales increased 0.5% in January, beating marketing forecasts of-0.3%. The annual rate decreased 5.1%, better than the -5.5% forecast but still pointing to a general trend of decline.

The composite PMI index fell rose to 53.1 in February, signalling a solid increase in private sector output.

PPI rose 0.5% in January, above the market estimate of a 0.1% rise, with the annual rate increasing 13.5%, slightly above the anticipated 13.3%.

China

Economic activity in China expanded sharply for a second straight month, in an early sign the country may be shaking off the impact of pandemic curbs sooner than expected. The IMF upgraded its growth forecast for China to 5.2% in 2023 and predicted that China would contribute around a third of global growth for the year. The annual inflation rate fell to 1.0% in February, below the market forecast of 1.9%, as customers remained cautious despite the removal of zero COVID policies.

The unemployment rate was level at 5.5% in January.

Composite PMI jumped to 54.2 in February, supported by a renewed rise in manufacturing output and a sharper gain in services activity.

Balance of Trade came in at a $116.88 billion surplus for January-February, far ahead of expectations and up on the previous surplus of $78 billion in December.

Asia region

The Bank of Japan maintained its key short terms interest rate at -0.1% at its February meeting.

Inflation increased 0.4% month on month and 4.3% annually in January, the highest level since December 1981, amid continuing higher prices for imported raw commodities and a weakened yen.

The unemployment rate fell to 2.4% in January, marginally below the 2.5% forecast.

The consumer confidence index in Japan increased marginally to 31.1 in February as the economy recovered further from pandemic disruptions, with households’ sentiment strengthening for both income growth and employment. Retail Sales in Japan rose 1.9% in January, far higher than the market consensus of a 0.3% rise, with the annual rate rising 6.3%, topping the market forecast of 4.0%.

The Composite PMI rose to 51.1 in February, with services activity growth accelerated to an eight month high.

Currencies

The Australian dollar (AUD) retreated over the month of February, closing 1.6% lower in trade weighted terms to 61.4. In contrast to January, the AUD depreciated relative to all four major currencies referenced in this update.

Volatility over the month expanded as positive risk sentiment brewing in January reversed. Greater resilience in the global economy coupled with stronger than anticipated economic data have moderated views of an imminent recession. This is somewhat bittersweet news as a lack of economic correction suggests that inflation may be stickier and more difficult for central banks to grapple in the short term.

Relative to the AUD, the US dollar (USD) led the pack in February, appreciating by 4.2%. Conversely, the Japanese Yen (JPY) was the laggard of the month, albeit with a positive relative return of 0.1%. Year-on-year, the AUD remains ahead of the JPY and the Pound Sterling (GBP) by 9.9% and 3.1% respectively. However now trails both the Euro (EUR) and USD by -1.6% and -6.9% respectively.

Important notice: This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL No.421445 (Lonsec).

Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “General Advice” (as defined in the Corporations Act 2001(Cth)) and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (‘financial circumstances’) of any particular person. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, redeem or sell the relevant financial product(s).

Copyright © 2023 Lonsec Research Pty Ltd (ABN 11 151 658 561, AFSL No. 421445) (Lonsec). This report is subject to copyright of Lonsec. Except for the temporary copy held in a computer’s cache and a single permanent copy for your personal reference or other than as permitted under the Copyright Act 1968 (Cth), no part of this report may, in any form or by any means (electronic, mechanical, micro-copying, photocopying, recording or otherwise), be reproduced, stored or transmitted without the prior written permission of Lonsec. This report may also contain third party supplied material that is subject to copyright. Any such material is the intellectual property of that third party or its content providers. The same restrictions applying above to Lonsec copyrighted material, applies to such third party content.

Sherlock Wealth Pty Ltd is a Corporate Authorised Representative of Matrix Planning Solutions Pty Ltd AFSL & ACL No. 238256, ABN 45 087 470 200.

Monthly Market Review – January 2023

How the different asset classes have fared: (As at 31 January 2023)

Data source: Bloomberg & Financial Express. Returns greater than one year are annualised.
Commentary regarding equity indices below references performance without including the effects of currency (unless specifically stated).

Key Points

• Equity markets had a strong month with Australia’s S&P/ASX 200 Index returning 2%. All sectors of the market finished the month in positive territory led by Consumer Discretionary, Materials and Property.
• Globally, developed markets performed strongly with the S&P 500 Index (USD) returning 3% and the FTSE Eurotop 100 Index (EUR) returning 6.6%.
• Likewise, in Asia the Hang Seng Index (HKD) generated a strong return of 4% and the CSI 300 Index (CNY) finished up 7.4%.

Australian equities

The Australian market commenced the year convincingly, with the S&P/ASX 200 Accumulation Index rising by 6.2% and every sector finishing positively apart from the Utilities (-3.0%) sector. In particular, the gain represents the best start to the year since the inception of the Index. The Consumer Discretionary (+9.9%) and Materials (+8.9%) sectors led the market as investor optimism around the future cash rate and inflation trajectory in an Australian and global context buoyed the broader market.

The Utilities sector was the biggest laggard as investors pivoted away from more defensive sectors in favour of more cyclical exposures. The Consumer Discretionary sector performed robustly as companies reported earnings. The Materials sector performed strongly as several commodities continued their recent rally on the back of the China re-opening demand. Further, the volatility in the Australian market was relatively subdued. Broadly speaking, the more ‘growth’ oriented and interest-rate sensitive sectors exhibited solid performance as investors weighed up the potential for central bank policy rate cuts in Australia and other global economies.

Global equities

Global equities started on a positive note as optimistic views around inflation fed through to possibilities around an ease in central bank tightening. Emerging markets outperformed developed market counterparts returning 3.8% (MSCI Emerging Markets Index (AUD)) versus a 3.0% gain according to the MSCI World Ex Australia Index (AUD).

Investor confidence was elevated during the month as global macro data surprised to the upside combined with China reopening earlier than expected. This was reflected by the Hang Seng Index and the CSI 300 Index, returning 10.4% and 7.4% respectively (in local currency terms) for the month. In the US, over a third of companies have reported, with earnings in aggregate being 0.6% above consensus and the S&P500 Index posting a monthly return of 6.3% (in local currency terms). Over in Germany, the DAX 30 Index reported a gain of 8.7% for the month (in local currency terms) as it continued to benefit from the easing of supply disruptions, a decline in the risk of gas rationing and further fiscal support.

Property

The S&P/ASX 200 A-REIT Accumulation index had a strong start to the calendar year advancing during January, with the index finishing the month 8.1% higher. Global real estate equities (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) also finished strongly, advancing 8.2% for the month. Australian infrastructure performed well during January, with the S&P/ASX Infrastructure Index TR advancing 1.9% for the month.

The positive start to the year is a welcome sight for REIT investors, as the listed property sector suffered a material decline in 2022. 2022 was the worst-performing year for REITs since the global financial crisis. Capital raising is expected to be a prominent theme in Q1 this year with the significant change in debt markets and cost of capital. In the global REITs market, we have already seen eight capital offering instruments in January, raising a total of $4.1bn in capital, in contrast to the $250m raised in December.

The Australian residential property market experienced a –1.1% change month on month in January represented by Core Logic’s five capital city aggregate. Brisbane (- 1.4%), Sydney (-1.2%), Melbourne (-1.1%) and Adelaide (-0.3%) all performed poorly whilst (0%) stayed relatively neutral.

Fixed Income

With no RBA meeting in January, there has been a pause on rate hikes, with rates expected to rise once again in February. This led to Australian 2- and 10- year Government bond yields falling by 23bps and 50bps, respectively. The fall in bond yields resulted in almost every fixed income sector being in the green, resulting in the Bloomberg AusBond Composite 0+ Yr Index to return 2.7% over the course of the month. Inflation has now risen to 7.8%, over the past 12 months to December, and CPI rose 1.9% this December quarter according to ABS data.

Globally, fixed income markets showed a mixed story, with US markets bracing for another rate hike in the next Federal Reserve Meeting on February 1. US 10-year Bond yields rose 37bps and US 90 Day T-Bill yields rose 30bps. In the United Kingdom, markets also await the return of the BoE meetings in February, with the current January bank rate sitting at 3.50%. Over January, U.K. 2 Year Gilt yields fell 11bps and U.K. 10 Year Gilt yields by 34bps.

Key points

• World Bank projects the global economy to grow by 7% in 2023 and 2.7% in 2024.
• Australian inflation for Q4 2022 rose to 8%, putting pressure on the RBA to increase the cash rate at its next meeting.
• The IMF forecasts the UK economy will contract by 0.6% in 2023 and be the only advanced economy to be in recession.

Australia

No RBA meeting was held in January, so the cash rate remained at 3.1%. However, as inflation remains high, the RBA is expected to raise rates when it meets in early February. The annual inflation rate for the December quarter rose to 7.8%, above the market forecast 7.5%, driven by rising food, fuel and new dwelling construction costs.

The unemployment rate rose marginally to 3.5% in December, above the market estimate of 3.4%. Retail sales fell 3.9% in December, amid high cost of living pressures and a change in buying patterns as shoppers took advantage of heaving discounting in November.

The Westpac-Melbourne Institute Index of Consumer Sentiment for January increased to 84.3, the largest monthly gain since April 2021. However, Westpac expects the Reserve Bank Board to continue its interest rate policy tightening in February which may impact future consumer sentiment. Composite PMI rose to 48.5 in January, with a contraction in services and the Services PMI below the 50.0 neutral level. The NAB business confidence index rose 3 points to -1 in December, staying in negative territory for a second month and below its long-run average.

The trade surplus narrowed to $12.2 billion in December, just below the market forecasts of $12.5 billion.

Global

The World Bank released its Global Economic Prospects report, projecting the global economy to grow by 1.7% in 2023 and 2.7% in 2024. This sharp downturn in growth will be widespread in the face of elevated inflation, higher interest rates, reduced investment, and disruptions caused by Russia’s invasion of Ukraine.

The Bank projects growth in advanced economies to slow from 2.5% in 2022 to 0.5% in 2023, with the US forecast at 0.5%, the Euro-zone at 0% and China at 4.3% for 2023. Over the past two decades, slowdowns of this scale have foreshadowed a global recession.

US

The Federal Reserve did not meet in January, so rates remained at 4.5%. Non-farm payrolls unexpectedly added 517,000 new jobs in January, well ahead of expectations of 185,000, led by gains in leisure and hospitality, profession and business services and health care. The unemployment rate was lower than expected at 3.4%. Consumer confidence unexpectedly dropped to 107.1 in January as households continued to worry about the economy’s prospects over the next six months. Retail sales declined 1.1% month-on-month in December, greater than the expected 0.8% fall, as holiday shopping was pulled forward into October.

The S&P Global Composite PMI rose to 46.8 in January indicating a softer contraction than in previous months. PPI fell 0.5% in December, adding to signs that inflationary pressure is easing, with the annual rate increasing to 6.2%, the lowest rate since March 2021.

The US trade deficit widened to $67.4 billion in December, against the forecast $68.5 billion.

Euro zone

The annual inflation rate in the Euro area fell to 8.5% in January, below the expected 9.0% with energy prices rising at a slower pace but food, alcohol and tobacco rising by 13.8%.

Consumer confidence rose to -20.9 in January, the highest since February 2022 on hopes lower energy prices and recovery fund spending might help avoid a recession. Retail sales declined 2.7% in December, while the annual rate dropped 2.8%, in a sign that rising prices and interest rates are weighing on consumer spending. November’s unemployment rate was stable at 6.6%, above market forecasts of 6.5%.

The Composite PMI rose to 50.3 in January, pointing to the first month of expansion in private sector since June 2022, helped by a rebound in services activity.

PPI rose 1.1% in December, well above the expected 0.4% with the annual rate easing further to 24.6%, well above the expected 22.5%.

UK

Inflation eased to 10.5% in December, the lowest rate in three months and matching the market forecast. Inflation is projected to fall to around 8.0 percent by mid-2023, and to around 4.0% towards the end of the year.

Consumer confidence fell to -45 in January, well below the expected -40, as consumers continue to grapple with persistently high inflation and soaring energy bills. Retail sales dropped 1.0% in December as consumers cut back on spending due to increased prices and affordability concerns. The annual rate dropped 5.8%, well below the forecast 4.1% decline.

The composite PMI index fell to 48.5, marginally below the 49 in December.

The IMF predicts that the UK economy will contract 0.6% in 2023 and be the only advanced economy to be in recession this year. It tempered this news by stating that it now believes the country is on the right track and expects the economy to grow 0.9% in 2024.

China

China’s economy slowed sharply only growing 3% in 2022, well below the official target of 5.5% for the year. The population also shrank for the first time since 1961 and combined with an ageing population, will have implications for future economic growth.

Prices were stable in December, with the annual rate rising to 1.8%, which is line with forecasts.

The unemployment rate dropped to 5.5% in December amid easing of zero-COVID policy restrictions.

Composite PMI rose to 51.1 in January, buoyed by the removal of harsh pandemic measures. Retail sales fell 0.14% in December, with the annual rate dropping 1.8%, much better than the expected 8.6% fall.

Asia region

The Bank of Japan maintained its key short terms interest rate at -0.1% at its January meeting. In its quarterly report, the bank lowered its FY23 GDP outlook from 1.9% to 1.7%.

Inflation increased 0.3% month on month and 4.0% annually in December, the highest reading since January 1991, amid higher process for imported raw commodities and continued weakness of the yen.

The unemployment rate was unchanged 2.5% in December, in line with forecasts. Wage growth jumped 4.8% in December on the back of a surge in special payments which helped overall wage growth.

The consumer confidence index in Japan increased to 31.0 in January as the economy continues to recover from pandemic disruptions. Retail Sales in Japan rose 1.1% in December, almost double the market consensus of a 0.6% rise, with the annual rate rising 3.8%.

The Composite PMI rose to 50.7 in January, with growth in the service sector due to the National Travel Discount Program.

Currencies

The Australian dollar (AUD) gained ground over the first month of 2023, closing 1.6% higher in trade weighted terms to 62.4. Additionally, the AUD appreciated against all four major currencies referenced in this update.

Volatility over the month was generally moderated as January welcomed positive risk sentiment among investors with equity and bond markets alike experiencing a lift. Given the broad shift of inflation into decline across the globe, investor confidence has buoyed as an end to the rate hike cycle seemingly approaches. This sentiment, coupled with strong expectations of growth from the reopening Chinese economy in 2023 has provided support to Australian exported commodities and consequently the AUD.

Relative to the AUD, the Pound Sterling (GBP) led the pack in January, albeit with a negative return of -1.5%. Conversely, the US dollar (USD) was the laggard of the month falling by -3.5%. Year-on-year, the AUD remains ahead of the Japanese Yen (JPY), GBP and now the Euro (EUR) by 12.9%, 8.8% and 3.1% respectively. However, the AUD continues to modestly trail the USD by -0.2%.

Important notice: This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL No.421445 (Lonsec).

Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “General Advice” (as defined in the Corporations Act 2001(Cth)) and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (‘financial circumstances’) of any particular person. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, redeem or sell the relevant financial product(s).

Copyright © 2023 Lonsec Research Pty Ltd (ABN 11 151 658 561, AFSL No. 421445) (Lonsec). This report is subject to copyright of Lonsec. Except for the temporary copy held in a computer’s cache and a single permanent copy for your personal reference or other than as permitted under the Copyright Act 1968 (Cth), no part of this report may, in any form or by any means (electronic, mechanical, micro-copying, photocopying, recording or otherwise), be reproduced, stored or transmitted without the prior written permission of Lonsec. This report may also contain third party supplied material that is subject to copyright. Any such material is the intellectual property of that third party or its content providers. The same restrictions applying above to Lonsec copyrighted material, applies to such third party content.

Sherlock Wealth Pty Ltd is a Corporate Authorised Representative of Matrix Planning Solutions Pty Ltd AFSL & ACL No. 238256, ABN 45 087 470 200.

Monthly Market Review – December 2022

How the different asset classes have fared: (As at 31 December 2022)

1 Bloomberg AusBond Bank 0+Y TR AUD, 2 Bloomberg AusBond Composite 0+Y TR AUD, 3 Bloomberg Barclays Global Aggregate TR Hdg AUD, 4 S&P/ASX All Ordinaries TR, 5 Vanguard International Shares Index, 6 Vanguard Intl Shares Index Hdg AUD TR, 7 Vanguard Emerging Markets Shares Index, 8 FTSE Developed Core Infrastructure 50/50 NR AUD, 9 S&P/ASX 300 AREIT TR, 10 FTSE EPRA/NAREIT Global REITs NR AUD
Source: Centrepoint Research Team, Morningstar Direct

International Equities

After a couple months of positive gains, international equity markets retraced by -5.48% and -5.21% in unhedged and hedged terms for the final month of the year. All three major US markets (Dow Jones, S&P 500 and NASDAQ) had their worst year since 2008. During December, markets started to price in a recessionary environment with elevated interest rates. This combination is rare as a recessionary period generally comes with a lowering of interest rates. Members of the United States Federal Reserve Bank have continued to keep expectations focused on higher interest rates throughout 2023. Indications of a slowing economy are forcing the markets to second-guess just how sustainable this is, however. Materials, information technology and consumer discretionary were the hardest hit sectors during the month and are indicative of recessionary (materials and consumer discretionary) and interest rate (technology) factors negatively impacting the market.

Australian Equities

Australian shares were not sheltered from this general market sell-off. The Australian market was down 3.3% in December with Technology, Real Estate and Industrials leading the way. Whilst the Australian market was down overall, the materials sector was buoyed by the reopening of China from their Covid-Zero policy. Energy and utilities also outperformed the ASX 200. Australia ended the year as the best performing index compared to the US, Europe, and Emerging Markets.

Domestic and International Fixed Income

International and domestic bonds had a negative month to end the year. International bonds fell 1.31% and domestic bonds fell 2.06%. The US raised rates another 50 bps in December and reaffirmed their commitment to stamping out inflation. This was perceived as negative for bonds as higher interest rates for longer amounts of time put downward pressure on bonds. A battle between bond traders and central banks is currently occurring. Bond markets are trying to suggest that interest rates should be lower by the end of 2023 due to a weakening global growth picture, however central banks thus far have remained adamant that interest rates will remain elevated. Throughout 2023, we will see who is correct.

Australian Dollar

The Australian Dollar (AUD) rallied 1.2% during December. This was aided by the US Dollar (USD) continuing its drop from the extremely elevated levels seen during its historic rise in 2022. This has allowed the Australian Dollar to continue to move higher from the lows of 0.63 AUD/USD in October this year. If economic growth expectations continue to deteriorate and inflation moderates in the United States, the Australian Dollar will benefit. If either of these trends reverse, the AUD could still move lower.

Disclaimer

The information provided in this communication has been issued by Centrepoint Alliance Ltd and Ventura Investment Management Limited (AFSL 253045).

The information provided is general advice only has not taken into account your financial circumstances, needs or objectives. This publication should be viewed as an additional resource, not as your sole source of information. Where you are considering the acquisition, or possible acquisition, of a particular financial product, you should obtain a Product Disclosure for the relevant product before you make any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. It is imperative that you seek advice from a registered professional financial adviser before making any investment decisions.

Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither Centrepoint Alliance Ltd nor its related entities, guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution.

Monthly Market Review – November 2022

How the different asset classes have fared: (As at 30 November 2022)

1 Bloomberg AusBond Bank 0+Y TR AUD, 2 Bloomberg AusBond Composite 0+Y TR AUD, 3 Bloomberg Barclays Global Aggregate TR Hdg AUD, 4 S&P/ASX All Ordinaries TR, 5 Vanguard International Shares Index, 6 Vanguard Intl Shares Index Hdg AUD TR, 7 Vanguard Emerging Markets Shares Index, 8 FTSE Developed Core Infrastructure 50/50 NR AUD, 9 S&P/ASX 300 AREIT TR, 10 FTSE EPRA/NAREIT Global REITs NR AUD
Source: Centrepoint Research Team, Morningstar Direct

International Equities

International shares have now had back-to-back months of positive returns following the gain of 5.45% in hedged shares and 2.01% gain in unhedged shares. Markets rallied due to a mild moderation in inflation within the United States (US). Inflation was 8.2% in September and has now fallen to 7.7% in October. Whilst the number remains elevated, markets are taking note of the change in direction. US inflation peaked at 9.1% in June and has fallen slightly each month. This naturally starts to put less pressure the central bank to keep interest rates elevated to fight inflation. Interest rates have been the biggest cause of pain for the markets this year and the reprieve from this has been positive for markets.

Australian Equities

Australian shares had a very strong month in November, inking a 6.44% gain. This was aided by hopes of a less aggressive US central bank but was also combined with rumours of a China reopening. China moving away from the Zero-Covid policy would be highly constructive for global economic activity and therefore stronger materials exports for Australia. It is still up for debate whether China will truly reopen in the near future, however, there appears to be a gradual trend towards this as government restrictions have greatly impacted the Chinese economy causing civil unrest in many regions.

Domestic and International Fixed Income

Both international and domestic bonds had a positive month, returning 2.37% and 1.55% respectively. Once again this was driven primarily from the decrease in inflation within the US. Asset classes generally have been moving in quite a correlated nature based on inflation news. This means equities and bonds are having positive months at the same time. Historically, bonds and equities have been negatively correlated, meaning one will do well when the other does not. This is not the case when inflation is high. Once a moderation of inflation occurs, this relationship should return. The timing of this is difficult to know.

Australian Dollar

The Australian Dollar (AUD) rallied 4.8% during November. As mentioned in last month’s report, signs of inflation moderation would benefit the AUD. This is exactly what occurred over the month as the USD finally showed a reverse in trend with a near 5% drop in the US Dollar Index. The uncertainty within markets still remains high, so any apparent trend has the potential to change quickly. That being said, there is some reprieve in USD upwards pressure. A toning down in interest rate increase rhetoric by the US central bank would significantly move the USD lower over the coming months and send the AUD upwards. If China decides to entirely reopen much like the rest of the world, the AUD should significantly benefit from this too.

Disclaimer

The information provided in this communication has been issued by Centrepoint Alliance Ltd and Ventura Investment Management Limited (AFSL 253045).

The information provided is general advice only has not taken into account your financial circumstances, needs or objectives. This publication should be viewed as an additional resource, not as your sole source of information. Where you are considering the acquisition, or possible acquisition, of a particular financial product, you should obtain a Product Disclosure for the relevant product before you make any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. It is imperative that you seek advice from a registered professional financial adviser before making any investment decisions.

Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither Centrepoint Alliance Ltd nor its related entities, guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution.

Monthly Market Review – October 2022

How the different asset classes have fared: (As at 31 October 2022)

1 Bloomberg AusBond Bank 0+Y TR AUD, 2 Bloomberg AusBond Composite 0+Y TR AUD, 3 Bloomberg Barclays Global Aggregate TR Hdg AUD, 4 S&P/ASX All Ordinaries TR, 5 Vanguard International Shares Index, 6 Vanguard Intl Shares Index Hdg AUD TR, 7 Vanguard Emerging Markets Shares Index, 8 FTSE Developed Core Infrastructure 50/50 NR AUD, 9 S&P/ASX 300 AREIT TR, 10 FTSE EPRA/NAREIT Global REITs NR AUD Source: Centrepoint Research Team, Morningstar Direct

International Equities

Global equities saw respite in October as September’s developed market losses were mostly erased. A combination of resilient corporate earnings in the US, easing concerns of an energy crisis in Europe and a mutual hope that Central Banks could be nearing a monetary policy pivot sent markets higher. The same could not be said for China and Hong Kong however, with the Hang Seng finishing the month materially lower. Investors are concerned that Premier Xi Jinping’s historic third term will be dominated by a fight to secure China’s economic independence. News that China will not relax its strict zero-COVID policy also weighed on sentiment. Chinese and Hong Kong markets are down -40.2% and -27% for the year, respectively. Emerging Markets were therefore unable to participate in the same rally seen by developed market equities as China’s returns weighed heavily. Despite this, there were still several winners. Indonesia, Thailand, India, Malaysia and South Africa outperformed the index. OPEC+’s production cuts assisted oil exporting markets to advance. The MSCI Emerging Markets Index (hedged to AUD) closed October -2.6% lower.

Australian Equities

The Australian market finished October with the S&P/ASX 200 Accumulation Index rising sharply by +6.0%, with nine out of the eleven sectors finishing positively. The top performers were the Financials (+12.2%), Property (+9.9%) and Energy (+9.5%) sectors as the broader market rebounded from substantial selling pressure in September.

The Financials sector was led by strong performance amongst the major Australian banks. The Property sector also rebounded from heavy year-to-date losses as investors continued to price in volatility around policy rate outlook. Likewise, Energy performed strongly as the tight supply conditions continued to place upward pressure on spot prices across various segments of the market.

Overall, geopolitical uncertainty abroad continued to persist, whilst major central banks indicated the prospect of further interest rate tightening to control persistently higher inflationary figures. In an Australian context, the CPI figures surprised to the upside with the Reserve Bank of Australia subsequently electing for an 0.25% increase in the cash rate.

Property

October experienced a considerable turnaround in performance for both the local A-REIT market and the broader Global real estate equities market, with the S&P/ASX 200 A-REIT Index (AUD) and the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged) advancing 9.9% and 2.9% MoM, respectively. This was the second-best month for A-REIT returns since the December 2020 rally. Australian infrastructure performed well during October, with the S&P/ASX Infrastructure Index TR advancing 7.8% for the month, and 7.9% YTD.

The Australian residential property market experienced a –1.1% change month on month in October represented by Core Logic’s five capital city aggregate. Brisbane (- 1.9%), Sydney (-1.3%) and Melbourne (-0.9%) were the worst performers. Adelaide (-0.3%) and Perth (-0.2%) stayed relatively neutral.

Domestic and International Fixed Income

Australian fixed income markets were met with a reprieve in October. While the RBA has continued to tighten, in their October meeting they increased the cash rate by a smaller than expected 25bps. Yields on 2 and 10-year Australian Government Bonds both fell by approximately 25bps over the course of the month, which was the primary driver in the Bloomberg AusBond Composite 0+ Yr Index returning 0.93% during the course of October.

Internationally, markets continued to sell off as a hawkish Federal Reserve has given no indication of an end to rate rises in the US. The Bloomberg Global Aggregate Index (AUD Hedged) returned -0.38% in October, while the unhedged variant returned -0.14% due to currency fluctuations

Australian Dollar

The Australian Dollar (AUD) fell 0.54% in the month of October. This was relatively mild compared to the prior months where the United States Dollar (USD) has been on a relentless upward trajectory. Intra-month the AUD fell 3% and then reversed course. Some weakness crept into the USD as markets hoped for signals of a tapering in interest rate increases. If inflation shows signs of moderating somewhat in the US, the AUD will have some potential to rally.

Disclaimer

The information provided in this communication has been issued by Centrepoint Alliance Ltd and Ventura Investment Management Limited (AFSL 253045).

The information provided is general advice only has not taken into account your financial circumstances, needs or objectives. This publication should be viewed as an additional resource, not as your sole source of information. Where you are considering the acquisition, or possible acquisition, of a particular financial product, you should obtain a Product Disclosure for the relevant product before you make any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. It is imperative that you seek advice from a registered professional financial adviser before making any investment decisions.

Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither Centrepoint Alliance Ltd nor its related entities, guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution.

Monthly Market Review – September 2022

How the different asset classes have fared: (As at 31 September 2022)

1 Bloomberg AusBond Bank 0+Y TR AUD, 2 Bloomberg AusBond Composite 0+Y TR AUD, 3 Bloomberg Barclays Global Aggregate TR Hdg AUD, 4 S&P/ASX All Ordinaries TR, 5 Vanguard International Shares Index, 6 Vanguard Intl Shares Index Hdg AUD TR, 7 Vanguard Emerging Markets Shares Index, 8 FTSE Developed Core Infrastructure 50/50 NR AUD, 9 S&P/ASX 300 AREIT TR, 10 FTSE EPRA/NAREIT Global REITs NR AUD
Source: Centrepoint Research Team, Morningstar Direct

International Equities

Global markets sharply returned to the downward trend that started in early 2022. Fresh concerns regarding global economic growth and stability hit the markets as central banks have not shied away from sticking to their policy of quashing inflation through increasing rates. Unhedged international shares fell 3.23% whilst hedged fell 8.89%. Significant volatility has been present in all asset classes, not excluding currency, which saw the US Dollar (USD) rise significantly on the month. This caused the wide divergence between hedged and unhedged returns. Cracks are starting to emerge in the global economy as the Great British Pound (GBP) had flash crash moment against the USD, highlighting the fragility of the global economic picture.

Australian Equities

Australian shares were not sheltered from this volatility as they fell 6.41% on the month. After being sheltered from significant market losses to begin the year, concerns over the weakening domestic picture and reliance on elevated house prices, sparked concerns as the Reserve bank continues its policy of increasing interest rates to stem inflationary pressures. Real Estate and Utilities lead the market lower with drops over 10% each on the month. Energy and materials were the better performers yet were still negative.

Domestic and International Fixed Income

Interest rates continued their march higher as domestic and international fixed income fell 1.36% and 3.5%, respectively. With inflation rates hitting near double digits across most developed economies, central banks have not yet found an opportunity to talk down future rate increases. This has been led by the US who have raised their target policy rate to 3.25%, a 15-year high. Australia has it’s highest policy rate since 2013, but keep in mind has not increased interest rates since 2009 before this recent change in policy.

Australian Dollar

The Australian Dollar (AUD) ended the month down a staggering 5.2% to the USD. This move had little to do with the economic strength of Australia versus the US but was primarily an incredible strengthening of the USD compared to all currencies. The USD as measured by the Dollar Index (DXY) is the strongest it has been since the early 2000s. The reason for this a combination of factors hurting the currencies it is compared to. The Euro, the Pound and Yen are the three main currencies measured against the USD and have all shown domestic weakness instigated by the European energy crisis, interest rate differentials compared to the US and poor policy decisions made by governments. This has amounted to a historic rise in the USD.

Disclaimer

The information provided in this communication has been issued by Centrepoint Alliance Ltd and Ventura Investment Management Limited (AFSL 253045).

The information provided is general advice only has not taken into account your financial circumstances, needs or objectives. This publication should be viewed as an additional resource, not as your sole source of information. Where you are considering the acquisition, or possible acquisition, of a particular financial product, you should obtain a Product Disclosure for the relevant product before you make any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. It is imperative that you seek advice from a registered professional financial adviser before making any investment decisions.

Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither Centrepoint Alliance Ltd nor its related entities, guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution.

Monthly Market Review – August 2022

How the different asset classes have fared: (As at 31 August 2022)

1 Bloomberg AusBond Bank 0+Y TR AUD, 2 Bloomberg AusBond Composite 0+Y TR AUD, 3 Bloomberg Barclays Global Aggregate TR Hdg AUD, 4 S&P/ASX All Ordinaries TR, 5 Vanguard International Shares Index, 6 Vanguard Intl Shares Index Hdg AUD TR, 7 Vanguard Emerging Markets Shares Index, 8 FTSE Developed Core Infrastructure 50/50 NR AUD, 9 S&P/ASX 300 AREIT TR, 10 FTSE EPRA/NAREIT Global REITs NR AUD
Source: Centrepoint Research Team, Morningstar Direc

International Equities

Global growth concerns rose during August with many forecasters revising their estimates for regional and global economic growth lower, this saw US, Europe and Japan all declining in local currency terms. Unhedged returned -2.72%, whilst hedged returned -3.55% across the month, which was in stark contrast from last month’s strong returns. The key drivers were the risks of rising interest rates, inflation surging in Europe, and lastly weaker consumer and business sentiment (as shown by the Markit PMI surveys).

Australian Equities

Australian shares stood out in August posting a positive 1.28% gain for the month. Earnings season was broadly well received with most stocks reporting positive earnings and sales surprises versus consensus estimates. The local technology sector disappointed slightly with Computershare missing on its earnings estimates. While Australia isn’t immune to rising energy prices, broad inflation (including wage growth) has remained more contained than is the case in the US for example. The labour market continues to hold up well and despite weaker consumer confidence, retail spending has also held up with discretionary consumer businesses performing well in the August 2022 reporting season, particularly amongst “bricks and mortar” retailer businesses.

Domestic and International Fixed Income

Negative returns within both Australian and International bonds occurred across the month (-2.54% and -2.72%, respectively). The bulk of the damage came following Federal Reserve Chairman Powell’s remarks on US monetary policy. His clear conviction was that the Fed’s task on inflation was still incomplete. This carried the implication of more rate rises being necessary. The pace of RBA hikes, however, is beginning to show meaningfully signs of weakening the economy. Credit growth is a leading indicator of house prices. The current trend suggests a meaningful correction is already underway and has more scope to continue. The negative impact on household wealth is likely to drag further on sentiment and ultimately spending.

Australian Dollar

The Australian Dollar (AUD) almost completed a round trip in August (AUD/USD). Starting the month of August at 0.7344 and ending August at 0.7316. Weakness in the Australian Dollar was caused by sharply falling commodity prices due to the slowdown of demand from China. The US dollar had a mixed run over the month of August. We saw a fall in the middle of the month due to stronger than expected payroll numbers and potential US interest rate cuts. This was then reversed following the speech at Jackson Hole by US Federal Reserve Chair Jerome Powell who reiterated that the Federal Reserve would continue to rase rates and fight inflation. This saw the US Dollar rise as it continues to be a haven asset for investors.

Disclaimer

The information provided in this communication has been issued by Centrepoint Alliance Ltd and Ventura Investment Management Limited (AFSL 253045).

The information provided is general advice only has not taken into account your financial circumstances, needs or objectives. This publication should be viewed as an additional resource, not as your sole source of information. Where you are considering the acquisition, or possible acquisition, of a particular financial product, you should obtain a Product Disclosure for the relevant product before you make any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. It is imperative that you seek advice from a registered professional financial adviser before making any investment decisions.

Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither Centrepoint Alliance Ltd nor its related entities, guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution.

Monthly Market Review – July 2022

How the different asset classes have fared: (As at 31 July 2022)

(As at 31 July 2022)
1 Bloomberg AusBond Bank 0+Y TR AUD, 2 Bloomberg AusBond Composite 0+Y TR AUD, 3 Bloomberg Barclays Global Aggregate TR Hdg AUD, 4 S&P/ASX All Ordinaries TR, 5 Vanguard International Shares Index, 6 Vanguard Intl Shares Index Hdg AUD TR, 7 Vanguard Emerging Markets Shares Index, 8 FTSE Developed Core Infrastructure 50/50 NR AUD, 9 S&P/ASX 300 AREIT TR, 10 FTSE EPRA/NAREIT Global REITs NR AUD
Source: Centrepoint Research Team, Morningstar Direct

International Equities

In stark contrast to the previous months, international equities posted strong returns during July 2022. Unhedged returned 6.46%, whilst hedged returned 8.02% across the month. Whilst central banks around the world are continuing to raise rates to combat inflation, markets are beginning to price in an easing of this policy as many economists are predicting a ‘peak in inflation’ towards the end of 2022. Time will tell as to whether this actually plays out. A reacceleration in inflation towards the later end of the year would be a shock to markets.

Australian Equities

Australia joined in on the global equity rally and posted a 6.34% gain for the month. This was led by Technology, Real Estate and Healthcare, all sectors which are most sensitive to interest rates. As long-term interest rates fell over the month, a tailwind behind these sectors took place. As a gloomier economic environment evolved over the month, sectors such as industrials and materials were hurt as they rely on economic growth to perform well.

Domestic and International Fixed Income

Positive returns within both Australian and International bonds occurred across the quarter with 3.36% and 2.49% gains, respectively. This is a significant change in trend to what has been occurring over the year. Significant drops in long term interest rates took place as a recessionary environment began to get priced into markets. These falls in interest rates are very positive for bonds overall and caused a significant rally globally.

Australian Dollar

The Australian Dollar (AUD) rallied 3.05% across the quarter as pullback occurred in the United States Dollar (USD). The US Dollar pullback occurred as the United States posted a 9.1% increase in inflation from this time in the previous year. The US has also entered a recession by posting two quarters of negative GDP growth. A gradual weakening in the USD has been the main cause of the AUD rise as opposed to Australian economic strength.

Disclaimer

The information provided in this communication has been issued by Centrepoint Alliance Ltd and Ventura Investment Management Limited (AFSL 253045).

The information provided is general advice only has not taken into account your financial circumstances, needs or objectives. This publication should be viewed as an additional resource, not as your sole source of information. Where you are considering the acquisition, or possible acquisition, of a particular financial product, you should obtain a Product Disclosure for the relevant product before you make any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. It is imperative that you seek advice from a registered professional financial adviser before making any investment decisions.

Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither Centrepoint Alliance Ltd nor its related entities, guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution.