Market Reviews

Month in Review as at October 2023

Index returns at October 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).

Market Key Points

• The Australian market continued its decline in October finishing the month lower by 3.8% with heavy falls in Information Technology, Health Care and Industrials, with Utilities being the only sector in the black.
• Overseas markets also declined, with falls across both developed and emerging markets.

Australian equities

October saw the ASX 200 finish down 3.8%, marking the third consecutive month of negative returns. Ten out of eleven sectors finished in the red, with Utilities finishing October as the only gainer (1.7%), while Information Technology (IT) (-7.6%), Health Care (-7.2%), Industrials (-6.4%), and Real Estate (-6.1%) saw losses. Several factors have contributed to the drag on returns, including stubborn inflation, rising bond yields, tentative company earnings outlooks and ongoing geo-political tension.

Utilities benefitted as investors moved to defensives, while IT was hit particularly hard by rising government bond yields. Megaport, a constituent of the IT sector, was a significant drag, as its quarterly customer growth report concerned investors. Expectations for a November RBA rate rise were high following accelerating retail spending data and a stickier than expected inflation report. This sentiment of rising interest rates was echoed in the yield-sensitive Real Estate sector as it saw a significant downturn.

Global Equities

Global Equities had another negative month across the board. Developed markets outperformed their emerging market counterparts, returning -1.0% (MSCI World Ex- Australia Index (AUD)) versus a -2.0% return according to the MSCI Emerging Markets Index (AUD).

Investor concerns continue around interest rates remaining higher for longer. US equities declined following the Federal Reserve’s stance of a “restrictive” policy until inflation seems to ease. This saw the S&P500 Index decline by -2.1% (in local currency terms) during the month. The same concerns were raised in the UK, also holding interest rates at 15-year historical highs. The FTSE 100 Index returned a loss of -3.7% (in local currency terms) for the month.

Equities across Asia were also predominantly negative. China’s economic growth recovery plans have seen a relative slowdown, due to headwinds in the real estate sector and investor pessimism around the levels of Government involvement. This was reflected by the CSI 300 Index, which returned -3.1% (in local currency terms) for the month.

Property

Local and Global REITs continued to sell off during October. Domestically the A-REIT index (represented by the S&P/ASX 200 A-REIT Accumulation Index) ended the month –5.8% lower. Global REITS (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) slightly outperformed the local REIT index, albeit still experiencing a significant drawdown of –4.4% during the month. Australian infrastructure finished lower through October, with the S&P/ASX Infrastructure Index TR returning –3.1% for the month.

October saw some activity on the M&A front across the A-REIT sector. Mirvac (ASX: MGR) entered into an agreement to acquire land lease operator Serenitas for $643mn. The acquisition expands Mirvac’s residential offering and makes them one of the largest owners in the land lease community sector. Centuria Industrial REIT (ASX: CIP) announced the divestment of two assets for a combined value of $70 during the first quarter of FY24. Dexus (ASX: DXS) announced that long standing CEO Darren Steinberg will step down after 11 years in the role in 2024 and are yet to announce a replacement.

The Australian residential property market experienced a +0.9% change month on month represented by Core Logic’s five capital city aggregate. Perth (+1.6%), Brisbane (+1.4%) and Adelaide (+1.3%) were the best performers. Notably, all five cities experienced positive change month on month through October.

Fixed Income

Michele Bullock has kept the cash rate at 4.10% in her first meeting as Governor of the RBA. The month saw bond yields rise, with Australian 10 and 2-Year Government Bond yields rising by 44bps and 37bps respectively. Unsurprisingly the Bloomberg AusBond Composite 0+ Yr Index returned -1.85% and the Bloomberg AusBond Credit 0+ Year Index AUD returned -0.77% over the month. The Australian economy has remained strong, meaning inflation has been slower to fall. Another rate hike is priced in for the RBA’s November Cup Day meeting.

Yields in the US continued to rise this month with US 10-Year Treasury note yields rising 36bps and 2-Year Treasury note yields rising 5bps. Strong economic data has kept central banks hawkish, and a peak this month in yields represented the highest yields for US 10-Year Treasury since 2007. However, the strong job market has maintained higher consumer spending levels and future rate hikes may lead to further rate hikes from the Fed.

Key Economic Points

• The RBA maintained the cash rate at 4.1%, but higher than expected inflation and retail sales in September indicate a rate rise in November.
• The US GDP for 3Q23 was 4.9%, contrasting with the Eurozone’s -0.1% for the same period.
• Eurozone inflation dropped unexpectedly to 2.9%, with the US steady at 3.7%. The UK remains the outlier with a stubbornly high rate of 6.7%.

Australia

The RBA held the cash rate at 4.1% in October, however higher than expected inflation and retail spending data in September increases the likelihood of a rise in November. Inflation for the September quarter rose to 1.2%, with the annual rate registering 5.4%, down from 6.0% in the previous quarter. The most significant price rise for the quarter was 7.2% in automotive fuel, the biggest rise since March 2022, which included the start of the war in Ukraine.

The Westpac-Melbourne Institute Index of Consumer Sentiment rose to 82 in October, but optimism remains in short supply in the face of persistently high inflation and renewed rate rise concerns. The unemployment rate fell to 3.6% in September, slightly below market expectations. Retail sales increased by 0.9% in September, largely due to a warmer than usual start to Spring, while annual sales rose 2.0%.

The composite PMI fell to 47.6 in October, driven by a solid decline in private sector activity. The NAB business confidence index also fell to 1 in September, well below average.

The trade surplus came in at a 30-month low of $6.79 billion in September, well below market forecasts of $9.4 billion.

Global

In its World Economic Outlook, the IMF revised down its forecast for global growth in 2024 to 2.9%, with the 2023 figure remaining at 3.0% – both below the 3.8% historical average. Advanced economies are expected to have growth rates of 1.5% in 2023 and 1.4% in 2024, amid stronger-than-expected US momentum but weaker-than- expected growth in the euro area. Emerging market and developing economies are projected to grow 4.0% in both 2023 and 2024, with a downward revision of 0.1% in 2024, reflecting the property sector crisis in China.

US

GDP growth for 3Q23 came in at 4.9%, well ahead of expectations and the prior quarter result, with consumer spending rising the most since 4Q21, led by housing and utilities. Annual inflation was steady at 3.7% in September, slightly above market expectations of 3.6%, as a softer decline in energy prices offset slowing inflationary pressures in other categories.

The economy added 150,000 jobs in October, below the anticipated 180,000, with the unemployment rate rising to 3.9%. The labor market is slowly cooling as several strikes including from members of the United Auto Workers union weighed on manufacturing payrolls.

Consumers remain unsure about the economic outlook with confidence dropping to 63.8 in October. Retail sales in September increased 0.7%, well above the 0.3% forecast, with the annual rate increasing 3.75%.

The S&P Global Composite PMI rose to 50.7 in October, a marginal increase on the previous month, despite fragile demand conditions.

The trade deficit widened to US$65.1 billion in September, above the forecast US$59.9 billion deficit.

Euro zone

The European Central Bank maintained the main interest rate at 4.5% at its October meeting, pausing at a 22-year high following ten consecutive rate hikes since July 2022. GDP shrank by 0.1% in 3Q23 while annual inflation slowed to +2.9% for October, its lowest rate since mid-2021. This suggests that the ECB is almost certainly finished raising interest rates.

PPI fell to 0.5% in September, with the annual rate dropping by 12.4% as energy costs continued to fall. Unemployment rose to 6.5% in September, above the market forecast of 6.4%.

Consumer confidence dropped to -17.9 in October, as continued sticky inflation eroded purchasing power. Retail sales fell 0.3% in September, exceeding the market expectations of 0.2%, suggesting that consumer demand is continuing to face challenges due to high interest rates and sticky inflation. The Composite PMI was lower at 46.5 in October, with a pronounced deterioration in the services sector.

UK

UK annual inflation remained at 6.7% in September, above the expected 6.6%, with core inflation dropping to 6.1%. Both these figures remain significantly above the Bank of England’s 2% target, further complicating the task for policymakers who are expected to keep interest rates unchanged in November.

PPI fell to 0.1% in September, compared to market expectations of a 0.2% decline. Consumer confidence fell sharply to -30 in September as the high cost of living and economic uncertainty weighed on sentiment. Retail sales dropped 0.9% in September, against an anticipated 0.2% fall. Annual sales fell 1.0%, more than the expected -0.1%.

China

The Chinese economy expanded by 4.9% in 3Q23, beating market forecasts of 4.4% and offering hopes that it will meet the official annual target of around 5% this year, as sustained stimulus from Beijing offset the impact of a prolonged property crisis and weak trade.

Chinese manufacturing data for October was well below market expectations. Both the official government and private Caixin/S&P Global manufacturing purchasing managers’ indices fell below 50, returning to a contraction of activity. The Chinese government’s non-manufacturing PMI also fell in October, indicating a slowdown in the construction and broader services sectors.

The unemployment rate improved to 5.0% in September, the lowest figure for nearly two years.

Annual inflation remained unchanged at 0% in September, ahead of the anticipated 0.2%. Annual retail sales grew 5.5% in September, exceeding market estimates of 4.9%. This is the ninth consecutive month of increases and the highest in four months.

Japan

The Bank of Japan modified its yield curve control policy, but not as much as investors had expected. The central bank had maintained a 1.0% upper limit on the 10-year government bond yield since July, but has now withdrawn its pledge to defend that level with unlimited bond buying, which leaves it more as a loose reference point rather than a rigid cap. The annual inflation rate fell to 3.0% in September, below the market forecast of 3.1%. This is the lowest reading in a year and core inflation dropped to a 13-month low of 2.8%.

The unemployment rate fell to 2.6% in September, in line with market expectations. The consumer confidence index rose to 35.7 in October, with sentiment increasing in most components. Retail sales fell 0.1% in September, with the annual rate rising 5.8%, just below the forecast 5.9%. The composite PMI came 50.5 in October, while this represents the tenth month of expansion, it is the weakest reading.

Currencies

The Australian dollar (AUD) depreciated over the month of October, closing -1.5% lower in trade weighted terms to 60.2, depreciating against all four referenced currencies in this update.

The fluctuations in the AUD throughout the month were linked to various factors, including the distressing events in the Middle East, US 10-year bond yields reaching their highest levels since 2007, adjustments in RBA interest rate hike predictions prompted by Q3 CPI data, and the S&P500 following the correction in Hong Kong and China stock markets.

Relative to the AUD, the Euro (EUR) led the pack in October, appreciating by 1.5%. Conversely, the Japanese Yen (JPY) was the laggard of the month, albeit appreciating in relative terms by 0.1% against the AUD. Year-on-year, the AUD remains behind the Pound Sterling (GBP), EUR and USD by -6.4%, -7.3% and -0.9% respectively, whilst ahead of the JPY by 1.0%.

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 September 2023

Index returns at September 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).

Market Key Points

• During September, the Australian equity market declined by 2.8%. Most sectors finished the month lower, except for Energy (+1.6%). Property (-8.6%), Information Technology (-7.9%) and Health Care (-6.2%) had the biggest declines in Australia.
• Overseas markets also declined, except for the FTSE 100 Index (GBP), which finished 2.4% higher. While acknowledging recent volatility, most global equity markets have generated moderate to strong returns over the one-year period.

Australian equities

The ASX 200 finished September down 2.8%, reflecting the losses seen globally. Energy was the only gainer (1.6%), with all the other 10 sectors finishing the month in the red. The largest drops were seen in Real Estate (- 8.6%), Information Technology (-7.9%), and Healthcare (-6.2%). However, Australian equities did manage to outperform some global markets.

Energy was the lone bright spot in the market, returning 1.6%, riding the tailwinds of rising global oil prices. In terms of laggards, the Real Estate sector was hit hard with an 8.6% drop, reflecting the “higher-for-longer” rhetoric regarding interest rates, and the potential impact on property values.

Given the potential impact of interest rates on high growth tech stocks, IT was another sector seemingly hampered by the hawkish sentiment in September, suffering losses of 7.9%. This mirrored the sell-off in US tech giants such as Apple, Nvidia, and Amazon.

Global equities

Global equities had a negative month, with September typically being the worst performing month historically for stocks. Emerging markets outperformed developed market counterparts returning -2.3% (MSCI Emerging Markets Index (AUD)) versus a -4.0% return according to the MSCI World Ex-Australia Index (AUD).

Continued negative economic data in September saw another rise in bond yields and a decrease in equity markets, with inflation falling slower than expected, primarily due to rising energy costs. US equities stumbled amid an interest rate hold and the prolonged possibility of a government shutdown, recording one of its worst months for the year with the S&P500 Index declining -4.8% (in local currency terms) during the month.

The UK was one of the few positive performers for the month, with the FTSE 100 Index returning a gain of 2.4% (in local currency terms). This was driven by a decrease in domestic core inflation and surprising GDP data above expectations. The Bank of England also kept interest rates on hold.

Property

The S&P/ASX 200 A-REIT Accumulation index finished September lower after consecutive positive months in July and August, with the index finishing the month – 8.6%. Global real estate equities (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) also fell, returning –5.3% for the month. Australian infrastructure finished lower through September, with the S&P/ASX Infrastructure Index TR returning -1.6% for the month.

In the month of September, M&A activity was relatively quiet. BWP Trust (ASX: BWP) announced the divestment of their Wollongong property to an unrelated third party for $40mn. In broader news Charter Hall (ASX: CHC) announced their new CFO, Anastasia Clarke, following the resignation of former CFO Russel Proutt. Cromwell Property Group (ASX: CMW) announced the resignation of their CFO Michael Wilde and are yet to announce a replacement.

The Australian residential property market experienced an increase by +0.9% Month on Month (as represented by CoreLogic’s five capital city aggregate). Adelaide was the largest riser (+1.7%), followed by Brisbane and Perth (both +1.3%). All five capital cities performed positively for the fifth consecutive month with Melbourne (+0.4%) being the worst performing city. Over the one-year period, Perth was the largest gainer (+8.8%).

Fixed Income

In his final meeting as RBA Governor, Phillip Lowe kept the cash rate on hold at 4.10% for the third month running. This month’s meeting signifies Lowe’s final monetary policy decision hand down, with his seven-year term not being renewed. During his term, Lowe and the RBA board cut rates to a historic 0.1 percent, and subsequently hiked rates 12 times in a bid to control inflation. Lowe’s successor, Michele Bullock, took over the role on September 17.

The month saw a sharp repricing of bond markets with yields rising to cycle highs. Australian 2- and 10- Year Bond yields rose 25bps and 46bps respectively, and the Bloomberg AusBond Composite 0+ Yr Index returned – 1.53%. Despite inflation rates falling and economic data showing a slowing economy, bond markets appear to be repricing due to concerns central banks are expected to maintain higher interest rates for a prolonged period.

The story was similar in the US, with the Federal Reserve holding the target cash rate steady at 5.25%- 5.50% citing easing inflation pressures and concerns of slowing economic growth. Despite the rate hike respite, bond markets experienced a poor month, correlating positively with equity markets. US 2- and 10- Year Treasury yields rose 18bps and 46bps respectively, and the Bloomberg Barclays Global Aggregate Index (AUD) returned -2.58% over the course of the month.

Key economic points

• RBA maintained the cash rate at 4.1% but reiterated that inflation is still too high.
• The Fed and Bank of England held cash rates at 5.5% and 5.25%, respectively.
• The ECB bucked the trend by raising rates to 4.5%.

Australia

The RBA held the cash rate at 4.1% in September, reserving the need for increases in the coming months to ensure that inflation returns to target in a reasonable timeframe. Inflation unexpectedly rose to 5.2% in August with the most significant rises in housing, transport, food and insurance.

The Westpac-Melbourne Institute Index of Consumer Sentiment fell to 79.7 in September, with pessimism persisting, despite easing fears of further interest rates. The unemployment rate was steady at 3.7% in August, matching market forecasts. Retail sales increased by 0.2% in August, below the market estimate of 0.3%, while annual sales rose 1.5%. These figures indicate that consumers continue to rein in spending as interest rates remain elevated.

Composite PMI increased to 50.2 in September, the highest figure in four months, indicating a return to expansion for the private sector. The NAB business confidence index came in at 2 in August with sentiment mixed across industries and falling sharply in mining.

Global

The World Bank has maintained its forecast for China’s 2023 economic growth at 5.1% in line with its previous estimate in April. Their predictions were trimmed for 2024 to 4.4 per cent from 4.8 per cent, citing the persistent weakness of its property sector.

US

The US Federal Reserve held interest rates steady at 5.25- 5.5% but released an updated “dot plot” for their future trajectory which proved more hawkish than previous expectations. Many policymakers anticipate one further 0.25% increase in the remainder of 2023, and the median expectations are for only 0.5% in rate cuts through calendar 2024, compared to double this level indicated in the last dot plot. Accompanying commentary confirmed that the Fed now sees the battle to return inflation to its 2% target stretching out to 2026. Annual inflation rose to 3.7% in August, above the expected 3.6%.

The US economy added 336,000 jobs in September, nearly double the anticipated 170,000. The unemployment rate was static at 3.8% in September. The labour market remains tight, adding leeway for the Federal Reserve to leave borrowing costs at restrictive levels for a prolonged period.

Consumers remain unsure about the economic outlook with consumer confidence edging up to 68.1 in September, but below the high of 71.6 in July. Retail sales in August increased 0.6%, beating the 0.2% forecast, with the annual rate increasing by 2.5%. The S&P Global Composite PMI fell to 50.1 in September, the fourth consecutive decline, suggesting broad stagnation in the private sector. The trade deficit narrowed to US$58.3 billion in August, better than the forecast US$62.3 deficit.

Euro zone

The European Central Bank raised interest rates to 4.5%, the 10th consecutive rise. This signals a possible end to policy tightening, as inflation has started to decline but is still expected to remain too high for too long.

Annual inflation fell to 4.3% in September, below the market consensus of 4.5%. The ECB forecasts average inflation at 5.6% in 2023 and 3.2% in 2024, both higher than previous estimates, primarily due to an elevated path for energy prices. PPI rose 0.6% in August, in line with market expectations, with the annual rate falling 11.5% as energy costs continue to fall.

Unemployment came in at 6.4% for August, matching the market forecast. Consumer confidence dropped to -17.8 in September, as households remain pessimistic about both their own and the wider economic outlook. Retail sales dropped 1.2% in August, compared with market expectations of -0.3%, with the annual rate down 2.1%, below the anticipated -1.2%. The Composite PMI rose to 47.1 in September, with a steep contraction in the manufacturing sector.

UK

The Bank of England held rates at 5.25% in September as policymakers opted for a wait-and-see approach, with inflation and labour data suggesting the accumulated impacts of previous policy tightening might be taking effect.

Annual inflation eased to 6.7% in August, below the expected 7.0%, primarily due to the slowdown in food inflation. PPI fell by 0.4% in August, compared to market expectations of a 0.6% decline.

 The unemployment rate increased to 4.3% in July, slightly above expectations, indicating that the labour market may be cooling off after months of unprecedented monetary policy tightening by the Bank of England.

Consumer confidence rose to -21 in September, above the expected -.27, amid growing optimism about the economy and easing pressures on household spending. Retail sales rose 0.4% in August, just below the market forecast of a 0.5% increase. Annual sales fell by 1.4%, more than the expected 1.2%.

The composite PMI index fell to 46.8 in September, driven by the continued contraction in manufacturing and a steep decline in the services sector.

China

The unemployment rate dropped to 5.2% in August, matching June’s 16 month low of 5.2%.

Annual inflation came in at 0.1% in August, below market expectations of 0.2%, with core inflation increasing 0.8%. Annual Retail sales grew 4.6% in August, exceeding market estimates of 3.0%.

Composite PMI fell to 50.9 in September, as new orders rose at a softer pace with manufacturers and service providers recording only marginal increases in sales.

This suggests the downturn in growth may be stabilising, but real estate remains a weak spot in the economy with property investment falling 8.8% in 2023.

Japan

The Bank of Japan maintained its key short-term interest rate at -0.1% and that of 10-year bond yields at around 0% in its September meeting by unanimous vote.

The annual inflation rate fell marginally in August to 3.2% just below the market forecast of 3.3%.

The unemployment rate was unchanged at 2.7% in August, above the market prediction of 2.6%.

The consumer confidence index dropped to 35.2 in September, with sentiment dropping across all components. Retail sales rose 0.1% in August, with the annual rate rising 7.0%, above the forecast 6.6%.

The composite PMI came in at 52.1 in September as services activity grew the least in eight months, while factory output fell at the fastest pace for three months.

Currencies

The Australian dollar (AUD) appreciated over the month of September, closing 0.8% higher in trade weighted terms to 61.1, strengthening against the Pound Sterling (GBP), Euro (EUR) and the Japanese Yen (JPY) whilst depreciating against the US Dollar (USD).

Volatility continued throughout the month, primarily influenced by relative US strength driven by US Employment data, shifting US bond yields and messaging from the Fed’s September meeting. Additionally, the AUD was influenced by economic indicators from China such as a slump in Caixin China Services PMI.

Relative to the AUD, the USD led the pack in September, appreciating by 0.5%. Conversely, the GBP was the laggard of the month, depreciating in relative terms by 3.2% against the AUD. Year-on-year, the AUD remains behind the GBP and EUR by -8% and -6.8%, respectively, whilst ahead of the USD and JPY by 0.6% and 3.7%, 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 August 2023

Index returns at end August 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

• During August, the Australian equity market declined by 0.7%. Most sectors finished the month lower, except for Consumer Discretionary (+5.7%), Property (+2.3%) and Energy (0.5%).
• Overseas markets also declined, with Asian markets in particular finishing the month substantially softer.
• The Hang Seng Index (HKD) and the CSI 300 Index (CNY) declined by 8.2% and 6.0% respectively.
• While most equity markets have generated moderate to strong returns over the one-year period, the Asian indices are outliers with declines of 4.4% and 5.3%.

Australian equities

The S&P/ASX 200 Accumulation Index fell 0.7% in August, as earnings results dampened market returns. Of the 11 sectors, only Consumer Discretionary (+5.7%), Property (+2.3%) and Energy (+0.5%) had positive returns for the month, while Utilities (-3.9%) and Consumer Staples (-3.2%) were the biggest drags on the Index.

Share prices battled with a combination of mixed earnings results and a conservative outlook for companies, while soft economic data out of China continued to weigh on local investors.

Consumer Discretionary was the standout performer for the month, benefiting from resilient consumers. Given the continued strain on households through a higher cost-of-living, many companies in the sector had flagged headwinds in the months leading into reporting season, with a conservative outlook already baked into share prices. Another theme to emerge from earnings reports is the ability for companies to manage cost pressures, particularly those brought about through higher financing rates. Despite revenue growth, Consumer Staples reported disappointing profit results, leading to their waning share prices. More broadly, the sustained impact of a slowing Chinese economy was seen across the market, particularly Materials.

The month saw all Factors perform negatively. Enhanced Value (-3.1%) and Low Volatility (-2.5%) were the worst performing factors, while Growth was able to limit its losses (-0.4%).

Global equities

Primarily negative economic data in August resulted in a rise in bond yields and a decrease in equity markets. With renewed investor concerns, US equities stumbled with the S&P500 Index declining -1.6% (in local currency terms) during the month.

Most sectors across Europe fell, with the DAX 30 Index returning -3.0% (in local currency terms) for the month. Energy was one of the sole positive contributors, inflation has remained stable but is yet to decline below previous months’ levels. The European Central Bank’s next meeting will be a watchpoint for investors.

China experienced some of the sharpest declines for the month with a potentially challenged real estate sector. Investor concerns around stimulus deployment largely contributed to this decline, with the CSI 300 Index returning -6.0% for the month (in local currency terms). In Hong Kong, stocks fell sharply with weaker manufacturing and real estate market concerns in surrounding markets. This was reflected in the Hang Seng Index returning -8.2% for the month (in local currency terms).

Property

The S&P/ASX 200 A-REIT Accumulation Index finished +2.3% higher in the month of August as the A-REIT sector continued its consolidation in recent months. In contrast, the Global Real Estate Equities market (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged) finished lower (-2.7%). The Australian Infrastructure sector (as represented by the S&P/ASX Infrastructure Index) finished -2.8% lower.

In the month of August, M&A activity was relatively muted as companies reported their full year results. Abacus Group (ASX: ABG) officially completed its de-stapling from Abacus Storage King (ASX: ASK). Ingenia Communities Group (ASX: INA) extended their development partnership with Sun Communities for an additional seven years. Meanwhile, Goodman Group (ASX: GMG) reported that Senko Co Ltd. signed a major lease agreement at their Goodman Joso location in Japan. The Australian residential property market experienced an increase by +0.1% Month on Month (as represented by CoreLogic’s five capital city aggregate). Brisbane was the biggest riser (+1.5%), followed by Adelaide (+1.1%). Over the one-year period, Perth was the largest gainer (+4.5%). In contrast, Hobart (-0.1%) was the only city to deliver negative returns in the month of August. Similarly, Hobart has the lowest percentage change year on year (-10.0%).

Fixed Income

In their August meeting, the Reserve Bank of Australia have for the second time elected to pause rate hikes and leave the target cash rate at 4.10%, citing slowing economic growth and pressure on household budgets. The Australian bond market reacted mildly, with Australian 2- and 10- Year Bond yields falling 23bps and 3bps respectively over the course of the month.

The Australian yield curve continued to flatten throughout August, and the Bloomberg AusBond Bank Bill Index returned 0.37%. Markets are expecting a similar story in September, with the RBA expected to hold rates steady next month. RBA Governor Philip Lowe’s tenure will soon end, and the position will be headed by his deputy Michele Bullock.

In the US, the Federal Funds Rate remains at 5.25%- 5.50% following the most recent July rate hike, with the Fed’s first-rate cut being priced into futures contracts by March 2024. The Bloomberg Barclays Global Aggregate Index (AUD) returned 2.62% over the month, and US 2- and 10-Year Treasury yields rose 1bp and 15bps respectively. In the UK, the interest rate is at 5.25% after the BoE hiked by 25bps in their August 2 meeting, resulting in UK Gilt yields rising over the month.

Key economic points

• Australia’s GDP for 2Q23 was 4%, with annual GDP at 2.1%.
• The RBA maintained the cash rate at 1%, while reiterating that inflation is still too high.
• Growth was tepid globally with 2Q23 GDP below (Eurozone) or matching (USA) 1Q23 figures.

Australia

Australian GDP came in slightly above expectations, increasing at an annual rate of +2.1% for the 12 months to June, despite very weak household consumption.

GDP growth has slowed from +2.4% to March, consistent with the RBA’s forecast for a continued softening of the domestic economy into the end of this calendar year before a gradual recovery through 2024 and 2025.

The RBA left the cash rate at 4.1% in August, reiterating that inflation was still too high and further tightening may be needed to bring inflation back to its target range of 2-3%. Inflation unexpectedly eased down to 4.9% in July, led by falling prices for fresh produce and fuel.

Westpac-Melbourne Institute Index of Consumer Sentiment came in at 81.0 in August, ahead of expectations of 80.7 with the RBA’s decision to hold rates steady for a second month in a row, doing little to quell worries about higher borrowing costs. The unemployment rate rose to 3.7% in July, above the expected 3.6% and underscoring the RBAs prediction that the labour market is near a turning point. Retail sales increased by 0.5% in July, topping market estimates of 0.3%, while annual sales rose 2.1%.

The composite PMI edged down to 48 in August, with services activity falling at a faster pace than manufacturing output. The NAB business confidence index rose to 2 in July with wholesale, construction and recreation & personal services accounting for most of the upswing.The trade surplus narrowed to $8.04 billion in July, below market forecasts of $10 billion.

Global

Record temperatures in August drove food prices higher with soybeans, olive oil and rice just three of the products affected by shortages and price hikes. While seasonal price fluctuations are usual, the exceptionally hot and dry summer experienced in the northern hemisphere has caused poor harvests and many crops to fail.

The war in Ukraine also continues to impact the global food supplies, as the UN brokered deal for safe passage of Ukrainian grains via the Black Sea collapsed, with Russia pulling out of the agreement. While some grain is still being exported via inland rivers, it takes longer and is more expensive than via sea.

US

The US economy grew at an annualized rate of 2.1% in 2Q23, ahead of the first quarter’s expansion of 2.0%. Annual inflation rose to 3.2% in July, just shy of the expected 3.3%.

The US economy added 187,000 jobs in August, more than market expectations of 170,000. This is the third month of sub 200,000 jobs growth and coupled with the increase in unemployment to 3.8%, suggests that the year of successive rate rises by the Fed is working to get inflation under control and avert a recession.

Consumers remain tentative about the outlook ahead with consumer sentiment falling from 71.6 in July to 69.5 in August. Retail sales in July increased 0.7%, beating the 0.4% forecast, with the annual rate increasing 3.2%. The S&P Global Composite PMI fell to 50.4 in August, with services activity weak and the contraction in manufacturing deepening.

The trade deficit widened less than expected to US$65 billion in July, from a downwardly revised US$63.7 billion in June, with China accounting for US$24 billion of this figure.

Euro zone

The Eurozone economy grew by 0.6% in 2Q23, easing from a 1.1% expansion in the previous period, due to the large drop in real incomes and surging interest rates.

Annual inflation remained steady at 5.3% in August, above the expectations of 5.1%. Unemployment stayed at the record low of 6.4% for July, matching the market forecast.

Consumer confidence dropped to -16 in August, as households were more pessimistic about both their own and the wider economic outlook.

Retail sales dropped 0.2% in July, below market expectations of – 0.1%, with the annual rate down 1.0%, ahead of the anticipated -1.2%.

The Composite PMI dropped to 46.7 in August, with the biggest contraction in services activity since November 2020. PPI dropped 0.5% in July, broadly in line with expectations, with the annual rate falling 7.6%. This can be attributed to the decrease in energy prices.

UK

The Bank of England increased the cash rate by 25bps to 5.25% in August, the 14th consecutive rise. The Bank came under renewed pressure to raise interest rates again in September after wages jumped more than expected in June, boosted by a one-off payment to NHS workers.

Annual inflation slowed to 6.8% in July, matching market expectations, mainly due to a sharp fall in fuel prices. This was mirrored in the annual PPI which fell be 0.8% in July, below the market expectations.

The unemployment rate increased to 4.2% in June and above market expectations of 4.0%.

Consumer confidence rose to -25 in July as easing inflation reduced pressure on household spending sentiment. Retail sales fell 1.2% in July 2023, worse than market forecasts of a 0.5% fall, as sales declined for both food and non-food, reflecting the impact of wet weather and cost pressures. Annual sales fell 3.2%, compared to the expected -2.1%.

The composite PMI index fell to 48.6 in August with both services and manufacturing activity declining.

China

In China, the unemployment rate rose to 5.3% in July, up from June’s 16 month low of 5.2%.

Annual Retail sales grew 2.5% in July, down from 3.1% in June and falling short of expectations. Both consumer and business confidence are flagging as the post pandemic recovery has stalled and many believe that policymakers have fewer good options to fight the downturn than in the past.

The Caixin/S&P Global Services PMI fell from 54.1 in July to 51.8 for August, the lowest reading since pandemic lockdowns in late 2022. The Composite PMI declined to 51.7, adding to the recent series of negative signals for the country’s future demand for Australian mining commodities.

China lifted anti-dumping tariffs on Australian barley in a move that points to improving bilateral relations and would alleviate supply concerns after Russia suspended a humanitarian corridor used to deliver key Ukrainian grains to global markets.

Japan

Japan’s 2Q23 GDP was slightly below expectations, coming in at 1.3% for the quarter, which may give further justification for the BOJ to relax its monetary stimulus.

The annual inflation rate was unchanged at 3.3% in July, notably higher than the market forecast of 2.5%.

The unemployment rate rose unexpectedly to 2.7% in July, defying market forecasts of no change from 2.5% in June.

The consumer confidence index dropped to 36.2 in August, below forecasts of 37.5. Retail sales rose 2.1% in July, with the annual rate rising 6.8%, exceeding forecasts.

The composite PMI came in at 52.6 in August with the fastest rise in services activity in three months offset by weakness in manufacturing production.

Currencies

The Australian dollar (AUD) continued to descend over the month of August, closing -1.1% lower in trade weighted terms to 60.6, depreciating against all four referenced currencies in this update.

Volatility over the course of the month continued to be primarily influenced by weaker economic indicators from China, further eroding investor conviction in China’s growth trajectory. In addition, relative US dollar strength predominantly stemming from the appreciation of the USD/CNY mid-month added additional drag to the AUD.

Relative to the AUD, the US dollar (USD) led the pack in August, appreciating by 3.8%. Conversely, the Japanese Yen (JPY) was the laggard of the month, albeit appreciating in relative terms by 1.5% against the AUD. Year-on-year, the AUD remains behind the Pound Sterling (GBP), Euro (EUR) and USD by -13.4%, -12.5% and -5.6% respectively, and has now fallen behind the JPY by -1.0%.

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 July 2023

Index returns at end July 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 finished up 2.9% in July. Most sectors delivered strong returns led by energy (+8.8%), Financials ex-Property (4.9%) and Information Technology (4.5%), while Health Care (-1.5%) and Consumer Staples (- 1.0%) were the only laggards.
• Except for Japan, most global markets finished stronger in July. The S&P 500 (USD) returned 3.2%, while the Nikkei 225 Index (JPY) was flat. European markets were softer over the month, with the FTSE 100 Index (GBP) (2.4%), and FTSE Europtop 100 Index (EUR) (1.5%). Chinese markets, as represented by the CSI 300 Index (CNY) finished the month 5.4% higher.

Australian equities

The S&P/ASX 200 Accumulation Index finished July up 2.9%, the second-best monthly performance for the index this year. Commodity price rises aided the gains, while consumer sentiment has improved with positive inflation and employment data releases. Energy (+8.8%), Financials ex-Property (+4.9%), Information Technology (I.T.) (+4.5%) and Utilities (+4.0%) led Sectors. In all, 9 of the 11 Sectors in the Index finished positively, with Health Care (-1.5%) and Consumer Staples (-1.0%) the only laggards.

The driving factor in Energy names was rising commodity prices, particularly oil. This was evident in the gains Woodside (ASX: WDS), whose stock also benefitted from a quarterly update that was received positively by investors. Meanwhile, the other monthly leader, Financials ex-Property, saw investors pile into the “Big 4” banks, which all had strong months in July. While the RBA has left rates on hold, the banks have continued to increase their rates for home loan borrowers. Investors expect the rate rises from the lenders to ease competition and lead to higher net interest margins.

The month saw all Factors perform positively, led by Enhanced Value (+6.3%), Shareholder Yield (+5.5%) and Quality (+4.1%).

Global equities

Global equities ended in a predominantly positive month with stabilising economic data. Emerging markets outperformed developed market counterparts returning 4.9% (MSCI Emerging Markets Index (AUD)) versus a 2.1% gain according to the MSCI World Ex Australia Index (AUD).

The U.S. markets had mixed results again, with inflation data falling in line with another expected rate hike. Most sectors were positive with standouts in Technology and Energy rising largely due to increased strength in suppliers. The S&P500 Index posted a gain of 3.2% (in local currency terms).

Emerging markets rallied strongest for the month, as China’s economic growth recovery plan continues, with new stimulus having positive effects across sectors; specifically manufacturing and real estate as indicated by development data. The CSI 300 Index returned 5.3% for the month (in local currency terms).

Property

The S&P/ASX 200 A-REIT Accumulation index advanced during July, with the index finishing the month 3.8% higher. Global real estate equities (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) also finished strongly, advancing 3.2% for the month. Australian infrastructure performed well during July, with the S&P/ASX Infrastructure Index TR advancing 4.1% for the month and up 13.2% YTD.

July was relatively quiet across the A-REITs sector. Some activities include Abacus Property Group (ASX: ABP) successfully completing the retail offer of their Abacus Storage King (ASX: ASK) REIT. This offer raised gross proceeds of approximately $34m which follows the institutional component last month that raised $191m. Charter Hall Retail REIT (ASX: CQR) announced the sale of their Bricksworth Marketplace, SA property for $85m representing a 6.1% premium to book value.

The Australian residential property market experienced an increase of +0.9% Month on Month (as represented by CoreLogic’s five capital city aggregate). Brisbane and Adelaide were the biggest movers (both +1.4%) with Perth (+1%) also performing strongly. All five capital cities performed positively for the third consecutive month.

Fixed Income

In its July meeting, the RBA decided to leave the cash rate on hold at 4.1%, pausing what has been an aggressive rate hiking cycle. The market responded with Australian 2-Year and 10-Year bond yields remaining elevated and rising by 4bps and 5bps respectively. Fixed income markets started to see some gains, with the Bloomberg AusBond Composite 0+ Yr Index returning 0.5% over the month.

In the US, bond markets continue to price the possibility of a recession and the US yield curve is inverted. The Federal Reserve raised rates in July by 25bps lifting the benchmark rate to 5.25-5.5%, which is the highest this range has been in 22 years. The market responded with US 10-Year and 2-Year Treasury yield rising by 15bps and 9bps respectively. US annual inflation for the year to June 2023 lowered to 3%. Globally, higher yields led to losses in fixed income markets, with the Bloomberg Barclays Global Aggregate Index (AUD) returning -0.5% over July.

Economic key points

• The IMF raised its global growth forecast for 2023 to 3%. It also predicts inflation to fall to 8% this year and 5.2% in 2024.
• RBA maintained the cash rate at 4.1%.
• Both the Fed and ECB raised the cash rate by 25bps in their July meetings to 5.50% and 4.25% respectively.

Australia

The RBA left the cash rate at 4.1% in its July meeting with the Board saying that it needs more time to assess the impact of past hikes. Annual inflation dropped to 6% in Q2, below the forecast 6.2%, primarily driven by a slowdown in goods inflation (5.8%). Services inflation came in at 6.3%, the highest rate since 2001.

The Westpac-Melbourne Institute Index of Consumer Sentiment for June rose by 2.7% to 81.3. Although the reported fall in inflation appears to have boosted confidence, the index remains in deeply pessimistic territory.

The unemployment rate eased to 3.5% in June, against the expected 3.6%. Retail sales in June declined 0.8% as cost-of-living pressures continued to weigh on consumer spending. Conversely, annual sales rose 2.3%, down from +4.2% the previous month.

The Composite PMI fell to 48.2 in July amid a renewed contraction in the service sector as interest rate rises hit customer confidence and budgets. The NAB business confidence index rose to 0 in June but shows warning signs of growth. In trend terms, confidence is weakest in retail and is also negative in wholesale and recreation & personal services, reflecting concerns about the outlook for consumption.

The trade surplus widened to $11.32 billion in June from a downwardly revised $10.49 billion in May, beating market forecasts of $11 billion.

Global

The International Monetary Fund (IMF) slightly raised its global GDP growth estimates for 2023 to 3%, however it continues to warn about persistent challenges over the medium term. The latest World Economic Outlook from the IMF points to reduced inflation as a factor in the improved outlook for 2023 but has kept its 2024 forecast unchanged – both standing at +3%.

India is expected to have the world’s highest growth rate this year at 6.1%.

The IMF also forecasts that global headline inflation will drop to 6.8% for 2023, down from 8.7% last year, with inflation predicted to fall to 5.2% next year. However, core inflation is likely to drop more slowly and not back in line with national targets until late 2024 or early 2025.

US

The Federal Reserve raised the cash rate by 25bps to 5.50% in its July meeting, bringing borrowing costs to the highest levels since January 2001.

Inflation rose 0.2% in June, slightly below the 0.3% the market expected, with the annual rate slowing to 3.0%.

Non-farm payrolls added only 187,000 jobs in July, below the forecast 200,000. The unemployment rate dropped to 3.5% in May, below the market expectation of 3.6%. This jobs data is largely supportive of the soft-landing narrative and is unlikely to influence Fed expectations. Consumer Confidence continued its bounce back, rising to 117.0 in July and likely reflecting lower inflation and a tight labour market.

Retail sales in June increased 0.2%, below the expected 0.5% with the annual rate increasing by 1.5%. The S&P Global Composite PMI declined to 52.0 in July, dragged down by slower service sector growth.

The trade deficit narrowed to US$65.5 billion in June, with China trade accounting for US$22.8 billion of this figure.

Euro zone

In July the European Central bank raised the key interest rate by 25 bps to 4.25%, citing persistently high inflation. At the same time, the annual inflation rate dropped to 5.3%, in line with market estimates.

Unemployment dropped slightly in June to 6.4, just under the market forecast.

Consumer confidence rose to -15.1 in July, the highest rate since February 2022. Retail sales dropped 0.3% in June, missing market expectations of + 0.2%. The annual rate was down 1.4%, ahead of the anticipated -1.7%.

The Composite PMI dropped to 48.9 in July, as new business inflows fell the most in eight months and backlogs of work dropped at the steepest rate in ten years. PPI dropped 0.4% in June, double the market expectations, with the annual rate falling 3.4%, against the forecast -3.1%. These drops were primarily driven by the decrease in energy costs.

Europe is counting the cost of fires across Greece, Spain and Portugal, as a ‘heat dome’ across the southern half of the continent led to the hottest temperatures on record.

UK

There was no meeting of the Bank of England in July, so the cash rate remained at 5.0%. Annual inflation slowed to 7.9% in June, the lowest level in a year. Inflation remains well above the 2% target rate and therefore, the Bank of England is expected to raise rates at its next meeting in early August.

Annual PPI fell by 2.7% in June, more than the market forecast of -1.6%.

The unemployment rate rose to 4.0% in May, above market expectations of 3.8%.

Consumer confidence fell to -30 in July as persistent inflation and rising interest rates weigh on sentiment. Retail sales rose 0.7% in June, above the anticipated 0.2%, boosted by summer sales and good weather.

Annual sales fell 1%, above the expected -1.5%.

The composite PMI index fell to 50.8 in July, mainly due to a sharp fall in manufacturing orders.

China

The Chinese economy expanded by 6.3% year-on-year in Q2 2023, faster than the 4.5% of the previous quarter but falling short of market estimates of 7.3%. The latest figures are distorted by a low base of comparison from last year when Shanghai and other major cities were under strict lockdowns.

The unemployment rate was unchanged at 5.2% in June, in line with market forecasts and below the government target rate of 5.5%.

Annual retail sales increased by 3.1% in June, below the forecast 3.2%, as sales for clothing, footwear and textiles slowed considerably.

Composite PMI fell to 51.9 in July, with manufacturing contracting for the first time in three months and services activity expanded at a slower pace.

China was hit hard by extreme weather in July from record-breaking heatwaves to deadly rain, with at least 20 people killed and 31,000 evacuated in Beijing due to severe flooding.

Japan

As expected, the Bank of Japan kept its key short-term interest rate unchanged at -0.1% and that of 10-year bond yields at around 0% in its July meeting. The Bank also made a surprise move by making its yield curve control policy more flexible in an effort to improve the sustainability of stimulus policy.

The annual inflation rate increased slightly to 3.3% in June, below the forecast 3.5%.

The unemployment rate came in at 2.5% in line with expectations and improving from a prior reading of 2.6%.

The consumer confidence index rose above forecasts to 37.1 in July, as the economy further recovered from pandemic disruptions. Retail sales fell 0.4% in June, with the annual rate rising 5.9%, which matched forecasts.

The composite PMI came in at 52.2 in July mainly underpinned by a solid expansion in the services sector. Factory activity remains subdued with both output and new orders falling.

Currencies

The Australian dollar (AUD) fell over the month of July, closing -0.7% lower in trade weighted terms to 61.3.

Key volatility drivers over the month of July included weaker than expected CPI and PPI data releases in the US, bolstering spirits that the Fed may be approaching its final rate hike for the cycle. In addition, softer Q2 CPI data released domestically caused the AUD to retreat on gains made earlier in the month.

Relative to the AUD, the Japanese Yen (JPY) led the pack in July, appreciating by 0.6%. Conversely, the US dollar (USD) was the laggard of the month, falling by – 0.9% relative to the AUD. Year-on-year, the AUD remains behind the Euro (EUR), Pound Sterling (GBP) and USD by -10.6%, -8.9% and -3.7% respectively, and remains ahead of the JPY by 2.6%.

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 June 2023

Index returns at end June 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).

Market Key Points

• The Australian equity market returned 1.8% in June. Strong returns were evident in Materials (4.8%), Information Technology (3.5%) and Financials ex Property (3.1%). All sectors finished higher during the month except for Property (-0.1%), Communications (-1.0%), and Health Care (-6.6%).
• Global markets finished higher, with the S&P 500 (USD) returning a strong 6.6%, while the Nikkei 225 Index (JPY) returned 7.6%. The FTSE Eurotop 100 Index (EUR) returned 2.7%.

Australian equities

The S&P/ASX 200 Accumulation Index finished June up 1.8%. Materials led all sectors, finishing up 4.8%.

Information Technology (I.T.) rose again (+3.5%), with Financials (+3.1%), Utilities and Consumer Staples (both +2.9%) also posting healthy gains. Health Care (-6.6%) fell significantly, dragged down by an announcement from its largest constituent, CSL, that forthcoming foreign currency headwinds were expected to be higher than previously estimated. Despite an extensive list of economic headwinds, the Index finished the Financial Year up 14.8%.

I.T. shares continued to ride the artificial intelligence (AI) wave and followed the gains that were seen globally in the sector; through the Financial Year it led all sectors, gaining 38%.

Chinese data releases solidified the weakening activity there and led to action to further stimulate the economy, helping Materials to lead the month. Meanwhile, a tight labour market and sticky inflation have seemingly increased the likelihood of further RBA cash hikes, mitigating the gains in those sectors sensitive to interest rates.

Global equities

Global equities had another positive month, while emerging markets underperformed developed market counterparts returning 0.9% (MSCI Emerging Markets Index (AUD)) versus a 3.1% gain according to the MSCI World Ex Australia Index (AUD).

The U.S had one of its better performances of the year, driven in part by the Federal Reserve holding interest rates steady for the first time in over 12 months. This was supplemented with sustained strides in the technology sector. Large caps led a gain of 6.6% in the S&P500 Index (in local currency terms).

Equities across Asia were relatively strong, Japanese stocks continued to rally with sound economic data around production levels across industries. The Nikkei 225 Index reached new highs again with a gain of 7.6% for the month (in local currency terms) despite potential concerns around inflation and yield curve control.

China’s economic growth recovery efforts see optimistic levels of manufacturing and industrial production, with the Central Bank releasing cuts to lending rates. This was reflected by the Hang Seng Index and the CSI 300 Index, returning 4.5% and 2.1% respectively (in local currency terms) for the month.

Property

The S&P/ASX 200 A-REIT Accumulation index was relatively neutral in June finishing the month 5bps lower. Global real estate equities (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) performed strongly, returning 3.2%, driven by a surge in the office sector (+10.4%), following a positive reception of a New York transaction. Australian infrastructure continued its positive momentum during June, with the S&P/ASX Infrastructure Index TR advancing +0.6% for the month.

The Australian residential property market experienced an increase by +1.3% Month on Month (as represented by CoreLogic’s five capital city aggregate). Sydney was the biggest riser (+1.8%) alongside Brisbane (+1.4%) also performing strongly. All five capital cities performed positively for the second consecutive month.

Fixed Income

For the first time in over a decade the Australian yield curve has inverted, with growing market concern around the possibility of a recession. The RBA continues to tighten monetary policy and has lifted the cash

rate by 25bps in its June 6 meeting, bringing the target cash rate to 4.1%. The cash rate is now 375bps higher than what it was 12 months ago. The market responded with Australian 2-Year and 10-Year bond yields rising by 66bps and 68bps respectively, their highest levels in a decade. Higher yields led to losses in fixed income markets, with the Bloomberg AusBond Composite 0+ Yr Index returning -1.95% over the month.

In the US, the Federal Reserve voted to maintain the May federal funds rate of 5%-5.25%. Despite the reprieve of a rate hike, fixed income markets fell, and US 10-Year and 2-Year Treasury yields rose by 49bps and 41bps, respectively. Globally, fixed income markets performed largely the same with the Bloomberg Barclays Global Aggregate Index (AUD) returning – 2.79% over June. Yield curve inversion seems to be a major trend with looming threats of further rate hikes, weak consumer confidence, and recession.

Economic key points

• Financial conditions are likely to remain tight as central banks maintain quantitative tightening and continue their hawkish rhetoric, signaling the potential for further rate rises.
• RBA increased the cash rate to 4.1%.
• The Fed kept the cash rate at 5.25% while the ECB increased interest rates by 25 bps to 4.0%.

Australia

The RBA unexpectedly raised the cash rate by 25bps to 4.1% at its June meeting, while keeping the door open for further tightening as inflation remained persistently high and wage growth picked up. This decision brought a total of 4% increases since May 2022, pushing the cash rate to its highest level since April 2012. The Westpac-Melbourne Institute Index of Consumer Sentiment for May rose to 79.2, with the index at near recession lows for the past year.

May’s monthly headline inflation figure came in at 5.6%, well above the RBA’s targeted 2% to 3% range, but still the smallest increase since April last year. The unemployment rate eased down to 3.6% in May, against the expected 3.7%, as 76,000 jobs were added. Retail sales for May rose by 0.7%, above the market expectations of 0.1%, reflecting some resilience in spending with consumers taking advantage of larger- than-usual promotional activity and sales events. This is also reflected in the 4.2% rise in the annual rate.

Composite PMI fell to 50.1 in June, with domestic demand driving new orders driven. The NAB business confidence index dropped 4 points to -4 in May, with declines in all industries except mining, manufacturing, and transport and utilities.

The trade surplus increased to $11.79 billion in May, above the market forecasts of $10.5 billion as exports to China grew 9% month on month.

Global

The World Bank and OECD both released updated growth forecasts for the remainder of this year and 2024. The World Bank increased its global growth forecast for 2023 to 2.1%, up from the earlier 1.7%, with the OECD increasing its estimate marginally to 2.7%. For 2024, the OECD estimate is unchanged at 2.9%, however the World Bank cited central bank monetary tightening and increasingly restrictive credit conditions for its decision to cut its estimate from 2.7% to 2.4%.

US

The Federal Reserve maintained the cash rate at 5.25% in its June meeting with officials suggesting that it may raise rates further this year.

Inflation rose 0.1% in May, slightly below the 0.2% market expected, with the with the annual rate dropping to 4.0%.

Non-farm payrolls added only 209,000 jobs in June, below the forecast of 225,000 jobs. The unemployment rate rose to 3.7% in May, above the market expectation of 3.5%. Consumer Confidence increased markedly to 109.7 in June, reflecting belief that labour market conditions will remain favourable and that there will be further declines in inflation, Retail sales in May increased 0.3%, well above the expected -0.1% with the annual rate increasing 1.6%. The S&P Global Composite PMI fell to 53.2 in June.

The trade deficit narrowed to US$69 billion in May on the back of a fall in imports.

Euro zone

In June the European Central bank raised the key interest rate by 25 bps to 4.0%, citing persistently high inflation. Christine Lagarde, ECB President, noted that with wage growth pressuring inflation, the bank needs to bring interest rates into sufficiently restrictive territory and therefore is likely to increase rates again in July. The annual inflation rate dropped to 5.5% in June, slightly below market expectation of 5.7%. Core inflation increased to 5.4%, supporting the view that policymakers are likely to continue raising rates in the upcoming months. Unemployment was flat at 6.5% in May, meeting market expectations and indicating a tighter labour market.

Consumer confidence rose to -16.1 in June, the highest rate since February 2022. Retail sales for May came in flat, against expectations of 0.2% The annual rate was down 2.9%, below the anticipated -2.7%.

The Composite PMI dropped to 49.9 in June, signaling a slowing of economic activity due to a deepening downturn in factory output and softer expansion in services. PPI dropped 1.9% in May compared to the expected -1.8%, with the annual rate falling 1.5%, against the forecast -1.3%. This drop in process was primarily driven by the decrease in energy costs, which fell 5% in the month.

UK

The Bank of England increased interest rates by a surprise 50bps to 5.0% in June in response to stubbornly high inflation. Policymakers have also flagged further hikes if the ongoing inflationary pressures persist.

Annual inflation was steady at 8.7% in May, above the expected 8.4% and remains the highest level of the G7.

The unemployment rate came in at 3.8% in April, below market expectations of 4.0% and a prior reading of 3.9%. Consumer confidence rose to -24 in June, better than the expected -26 as households grew more optimistic about their finances and the economy. Retail sales rose 0.3% in May, with the annual rate falling 2.1%, below the expected -2.6%.

The composite PMI index fell to 52.8 in June, missing market expectations and aligning with Europe wide trend of steady services growth offsetting the accelerated slump in manufacturing.

Annual PPI fell sharply to 2.9%, below the expected 3.6%, due mainly to the continued fall in petroleum prices.

China

Annual inflation was unexpectedly flat in June, compared to an expected 0.2% increase.

The unemployment rate was unchanged at 5.2% in May, in line with market forecasts and below the government target rate of 5.5%.

Annual retail sales increased by 12.7% in May, below the forecast 13.6% and well down on the record increase of 18.4% in April.

Composite PMI fell to 52.5 in June, with the services sector continuing its post COVID rebound but at a slower pace than previous months. Manufacturing activity decline for a third straight month as demand falters both in China and abroad.

China’s economy grew faster than expected in the first quarter largely due to a strong post-COVID rebound in consumption, but policymakers have been unable to sustain the momentum in the second quarter. The government is expected to announce more stimulus measures, but these are likely to be smaller and more targeted as concerns over debt and capital flight remain.

Japan

As expected, the Bank of Japan kept its key short-term interest rate unchanged at -0.1% and that of 10-year bond yields at around 0% in its June meeting by unanimous vote. This approach is in sharp contrast to other major central banks who have raised borrowing costs to decade highs.

Referencing the economy as a whole, the board expects output to recover toward the middle of FY 2023, supported by pent-up demand.

The annual inflation rate unexpectedly declined to 3.2% in May, below the forecast 4.1%.

The unemployment rate was flat at 2.6% in May, in line with market forecasts.

The consumer confidence index rose to 36 in June, matching forecasts, and is the highest reading in 18 months. Retail sales increased 1.30% in May, with the annual rate rising 5.7exceeding the market forecast of 5.4%.

The composite PMI fell to 52.1 in June, with softer expansion in services and the eleventh fall the past year for manufacturing.

Currencies

The Australian dollar (AUD) gained ground over the month of June, closing 3.2% higher in trade weighted terms to 61.7, appreciating against all four referenced currencies in this update.

June found itself filled with mixed signals for the market, volatility primarily being influenced of the course of the month by an assortment of both positive and negative economic data releases from China and the US, amongst disparate signals from the RBA on monetary policy and the status of the rate hike cycle.

Relative to the AUD, the Euro (EUR) led the pack in June, depreciating by -0.5%. Conversely, the Japanese Yen (JPY) was the laggard of the month, falling by -6.4% relative to the AUD. Year-on-year, the AUD remains behind the Pound Sterling (GBP), EUR and US dollar (USD) by -7.5%, -7.4%, and – 3.6% respectively, however is now ahead of the JPY by 2.5%.

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 May 2023

Index returns at end May 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 finished down 5% in May. While strong returns in Information Technology were evident, most sectors of the market finished the month lower.
• With the exception of the US and Japan, most global markets finished May The S&P 500 (USD) returned 0.4%, while the Nikkei 225 Index (JPY) returned 7.0%.
• European markets were softer over the month, with FTSE 100 Index (GBP) and FTSE Europtop 100 Index (EUR) weaker 4.9% and 2.0% respectively. Chinese markets, as represented by the CSI 300 Index (CNY) finished the month 5.6% weaker.

Australian equities

In May the S&P/ASX 200 Accumulation Index finished with a loss of 2.5%. Rising costs have begun to materialise for consumers as retail turnover plateaued, with another RBA hike and a fall in the iron ore price also impacting returns. Information Technology (I.T.) shares rose significantly (+11.6%), with Utilities making the only other meaningful jump (+1.1%). Consumer Discretionary (-6.1%) and Staples (-4.6%) were noteworthy laggards. Materials (-4.4%) and Financials ex-Property (-3.3%) also dragged on the Index. In total, 7 of the 11 sectors posted losses. I.T. advanced on the positive news from some of its names, while attention to the rise of artificial intelligence also aided gains.

Meanwhile, retail spending data led to investors positioning for a slowdown, as cost of living pressures saw consumers pull back on non-essential shopping. As doubts linger around the economic recovery in China, the sliding price of iron ore hampered Materials. Financials ex-Property were pushed down by poor US banking sentiment, as well as concerns about the domestic outlook for earnings and margins.

Global equities

Global equities ended with a predominantly negative month with declining economic data. Emerging markets underperformed developed market counterparts, returning 0.4% (MSCI Emerging Markets Index (AUD)) versus a 1.2% gain according to the MSCI World Ex Australia Index (AUD).

The U.S. markets had mixed results, with the debt ceiling debate being suspended on top of another expected rate hike. Lower unemployment and promising developments in the technology sector, particularly artificial intelligence and chipmakers, led a positive gain of 0.4% in the S&P500 Index (in local currency terms).

Equities across Asia were also mixed, Japanese stocks became more attractive for investors with sound earnings results with share buyback announcements for large cap stocks. The Nikkei 225 Index reached new highs with a gain of 7.0% for the month (in local currency terms).

China’s economic growth recovery continued to perform beneath investors’ expectations with demand also decreasing. This was reflected by the Hang Seng Index and the CSI 300 Index, returning -7.9% and -5.6% respectively (in local currency terms) for the month. Investors are waiting for stronger indications of an economic recovery in China, potentially led by the technology sector.

Property

The S&P/ASX 200 A-REIT Accumulation index regressed in May after a strong rally in April, with the index finishing the month –1.8% lower. Global real estate equities (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) also regressed, returning -3.8% for the month. Australian infrastructure continued its positive momentum during May, with the S&P/ASX Infrastructure Index TR advancing +1.5% for the month.

The Australian residential property market experienced an increase by +1.4% Month on Month (as represented by CoreLogic’s five capital city aggregate). Sydney was the biggest riser (+1.8%) alongside Brisbane (+1.4%) also performing strongly. All five capital cities performed positively in the month for the first time in over two years.

Fixed Income

Credit markets saw a decline as interest rates rose again in May when the Reserve Bank of Australia increased the official cash rate from 3.60% to 3.85%, leading to a – 1.21% return of the Bloomberg AusBond Composite 0+ Yr Index. Over the course of the month, spreads widened as Australian 2Y and 10Y Bond yields rose by 50bps and 27bps, respectively. Persistent inflation pressures along with a strong labour market and rising wages have the potential to keep inflation rates above the RBA target for an extended period.

Global markets were taken aback in early March by the unexpected failure of three small- to mid- size US banks, followed by the collapse of Credit Suisse. The effects from the March turmoil continue to affect markets with the Bloomberg Barclays Global Aggregate Index (AUD hedged) returning -0.54% over May. In a decision widely expected by markets, the U.S Federal Reserve again increased rates by 25bps bringing the federal funds rate to a target of 5.0%-5.25%. Bond yields continued to grow with US 2Y and 10Y Treasury Note yields rising 45bps and 22bps, respectively.

Key points – Economic

• Services inflation, rent rises and wage pressures persist, meaning inflation could remain sticky and above central bank target ranges for some time.
• RBS increased the cash rate to 3.85%
• Both the Fed and ECB increased interest rates by 25 bps to 5.25% and 3.75% respectively.

Australia

The RBA increased the cash rate by 25bps to 3.85% at its May meeting. The board agreed further increases may still be required, depending on how the economy and inflation evolve. The Westpac-Melbourne Institute Index of Consumer Sentiment for May fell to 79.0, from 85.8 in April, with consumers showing deep pessimism after a surprise interest rate hike and mildly disappointing federal budget. A large number of home borrowers will roll off ultra-low fixed rate home loans onto significantly higher mortgage rates in the coming months, further dampening consumer confidence.

GDP grew 0.2% over the three months to 31 March 2023, down from 0.5% in the previous quarter and below the expected 0.3 % increase.

The inflation rate rose to 6.8% in April, driven by energy prices, with the underlying rate easing to 6.5%.

April’s unemployment rate increased to 3.7%, above the market expectation of 3.5%. Retail sales were flat as well, below market expectations of a 0.3% rise as consumers spent less on discretionary goods in response to cost-of-living pressures and rising interest rates.

Composite PMI fell to 51.6 in May, with services expanding at a slower pace than previous months. The NAB business confidence index rose 1 point to 0 in April, still below the average, with confidence still negative in retail, wholesale and finance, business and property.

The trade surplus decreased to $11.2 billion in April, below the market forecasts of $14 billion with the main driver a fall in total exports to China of 15.4%.

Global

Inflation is likely to ease substantially in the coming months as base effects roll off and tighter credit conditions hit consumption and aggregate demand. However, services inflation, rent rises and wage pressures persist, meaning inflation could remain sticky and above central bank target ranges for some time.

Financial conditions are likely to remain tight as central banks keep a foot on the brake while managing pockets of stress via targeted liquidity support. Consumer confidence remains weak globally and with the cash buffers built up during the pandemic largely eroded, signs that economic growth has begun to slow have emerged.

US

The Federal Reserve increased the cash rate by 25bps to 5.25% in its May meeting with officials expressing uncertainty about how much more policy tightening may be appropriate in the future. Inflation rose 0.4% in April, matching market expectations, with the annual rate falling to 4.9%.

Non-farm payrolls unexpectedly added 339,000 jobs in May, way above the forecast 190,000 jobs. The unemployment rate rose to 3.7% in May, above the market expectation of 3.5%. Consumer confidence fell to 102.3 in May, down from an upwardly revised 103.7 in April. Retail sales in April increased 0.4%, well below the expected 0.8% with the annual rate increasing 1.6%. The S&P Global Composite PMI rose to 54.3 in May on the back of increased activity in the services sector.

The trade deficit widened to a six-month high of US$74.6billion in April, compared to the expected US$75.2 billion.

Euro zone

With inflation remaining well above the target level, the European Central Bank raised the key interest rate by 25 bps to 3.75%. The latest announcement slows the pace of rate hikes after the ECB had raised the key interest rate by 0.5% at its previous three opportunities. The annual inflation rate fell to 6.1% in May, below the expected 6.3%, largely driven by the 1.7% decrease in energy prices. Unemployment was flat at 6.5% in April, meeting market expectations.

Consumer confidence increased slightly to -17.4 in May. Retail sales for April came in flat, against expectations of 0.2% The annual rate was also down 2.6%, above the anticipated -3.0%.

The Composite PMI dropped to 52.8 in May. Services activity continued to grow, albeit at a slower rate, while manufacturing production declined at the sharpest pace since November due to rapidly deteriorating order books. PPI dropped 3.2% in April, slightly below the expected -3.1%, with the annual rate dropping to 1%, below the predicted 1.4%.

Persistent inflation has helped push Germany into recession, with the economy contracting 0.3% in the first three months of the year, following the 0.5% contraction in the last three months of last year. The recession is likely to be not as long or deep as some predicted with the German central bank forecasting modest growth in Q2 2023.

UK

The Bank of England increased interest rates by 25bps to 4.5% in May as it continues to battle high inflation.

Inflation rose 1.2% in April, bringing the annual rate to 8.7%, which is below the 10% mark for the first time in eight months. The central bank now sees inflation falling to 5.1% in Q4 2023, compared to 3.9% in the February forecast and to meet its 2% target by late 2024.

The unemployment rate for March came in at 3.9% against expectations of 3.8% and following a prior reading of 3.8%.

Consumer confidence rose to -27 in May, matching expectations. Annual retail sales fell 3.0%, above the anticipated 2.8% fall.

The composite PMI index fell to 54 in May, with divergence between the services and manufacturing sectors continuing as the expansion for service providers (55.2 vs 55.9 in April) offset the decline for goods producers (47.1 vs 47.8).

PPI was flat month on month in April, with the annual rate easing sharply to 5.4%, mainly due to the further decline in prices of petroleum products.

China

Inflation declined 0.2% in May and rose 0.2% year on year, highlighting Beijing’s challenge to stimulate enough economic activity and growth to kill the threat of deflation.

The unemployment rate declined to a 16-month low of 5.2% in April, below the government target of 5.5%. In response to the record high unemployment rate of 16-24 year of 20.4%, the government has adopted an ‘employment- first strategy’ with the hopes of adding 12 million new jobs this year.

Annual retail sales for April increased by 18.4%, missing market forecasts of 21.0% but sharply accelerating from the 10.6% gain in March.

Composite PMI rose to 55.6 in May, the fifth straight month of growth in private sector activity and the steepest pace since December 2020.

India overtook China as the world’s most populous country in April. India’s population is virtually certain to continue to grow for several decades. By contrast, China’s population reached its peak size recently and experienced a decline during 2022.

Japan

Japan’s GDP expanded an annualised 2.7% in January-March, much higher than the preliminary estimate of a 1.6% growth and economists’ median forecast for a 1.9% rise. This expansion was spurred by a post pandemic pick up in domestic spending and company restocking and helped offset the decrease in exports due to slowing global demand.

Inflation increased 0.6% month on month with the annual rate rising to 3.5% in April. The unemployment rate fell to 2.6% in April, below the expected 2.7%.

The consumer confidence index rose to 36 in May, slightly below the forecast 36.1, as household sentiment strengthened across most of the indices. Retail sales fell 1.20% in April, with the annual rate rising 5%, missing the market forecast of 7%. Despite missing forecasts, it was the 14th consecutive month of expansion as the country continues to recover from the pandemic slump.

The composite PMI increased to 54.3 in May, with service sector expanded at a record pace for the second straight month, while manufacturing production returned to growth for the first time in 11 months.

Currencies

The Australian dollar (AUD) closed out the month of May with no change in trade weighted terms, holding at 59.8.

May saw a return to more ‘normal’ trading ranges with the AUD/USD pair marginally breaching the 10-year average of 3.5 cents.

Volatility throughout the month was primarily led by the unexpected interest rate hike of 0.25% by the RBA, in addition to weaker than expected Purchasing Managers Index (PMI) survey data released in China.

Relative to the AUD, the US dollar (USD) led the pack in May, appreciating by 2.3%. Conversely, the Euro (EUR) was the laggard of the month, falling by 1.2% relative to the AUD. Year-on-year, the AUD remains behind the USD, EUR, Pound Sterling (GBP) and Japanese Yen (JPY) by -10.1%, -9.3%, -8.4% and -2.2% respectively and is down by -4.5% 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 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 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.

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.

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.