Quarterly Market Update – Q4 2022

December Quarter 2022

Market and Asset Class Views


There is a market saying “If its grey – stay away”. In our DAA table opposite we have a lot more grey than usual. This means we are largely playing to our long-term SAA settings as we now sit in a fast-moving market, which for DAA can be problematic. So, we focus on the long term. Notwithstanding this, advice to clients inside asset classes is to be more defensive in sector holdings with a major tilt to Quality. Weaker stories in equity and credit holdings will come under pressure. Duration and yield in Government and Investment Grade are now presenting a viable alternative to the previously dominant ‘There is no alternative – TINA’ story.

The strong USD and associated global market impacts is the dominant theme across our current thinking. This one driver will determine where markets play out this quarter. As the $A heads lower to 60c we do advise clients to consider to start increasing hedge positions against $US assets.

Portfolio Resilience is key.

Australian Equities – starting to show value?

Amazingly the quarter just passed was positive with a +0.45% return. Notably the ASX MidCap 50 was up +5.2%. September was a horrible month with Utilities, Real Estate and Industrial sectors continuing the poor quarter and with Energy and Healthcare providing some positive performance.

The question is now being asked as to whether the bulk of the bad news has been already priced in? We have several tailwinds here: a resilient consumer – to date – in the face of rising interest rates and cost of living supported by record low unemployment and higher wages. Despite the petrol tax relief ending, energy price pressures on the back of a weaker oil price have ameliorated.

Overall, the Australian market is one of the cleaner stories globally. Preference is for Quality over Growth and large cap over small. Whilst the China story presents a binary outcome the expectation of a “muddle through” and low $A should support markets.

Almost a modest overweight, but not quite yet – Neutral.

US Equities – valuation matters

The Fed’s continuation of rate hikes to fight rising inflation, economic growth and geopolitical concerns, and a soaring U.S. dollar combined to drive losses across US equities in the quarter. Technically the S&P 500 is weak, breaking its 3-year moving average with the next level of technical support back at 3200 which is the 6-year moving average.

Current EPS for 2023 for the S&P 500 is $231 (Factset) and the forward PE stands at 15.2x. This is “cheap” based on recent history, whether this represents good value depends on the answers to the following questions:

  • What impact will the strong “wrecking-ball” USD have on US domiciled multinationals through softer earnings?
  • Apple’s sales numbers point to even the mighty are facing a softer market. All the majors or is it Apple specific?
  • Energy price movement as higher prices will act as a tax or boost to consumer spend.
  • US employment remains robust and recent consumer spending remains elevated.
  • US Housing with mortgage rates over 6% will act as a brake.

A better price entry point but, we will see how this quarter plays outNeutral.

EU Equities – cheap but for a lot of reasons

German inflation accelerated during the quarter with the CPI index rising from 8.8% to 10.90% year on year. At the core was energy costs jumping 43.9% and food 18.7%.

Despite EU Equities being cheap, key consumer demand indicators reflect concerns around elevated inflation, energy supply uncertainty (Nord Stream fractures haven’t helped) and the unresolved geopolitical conflict in Ukraine. European listed real estate was down 17.1% for the Quarter and a whopping 42.0% for the 12 months.

We cannot pass without commenting on the UK, as recent events point to the perils of politics and where the bond vigilantes emerged as victors. Given the prevailing confusion playing out through currency and bond markets, the UK equity market remains a no-go zone.

Whilst the EU is cheap and we are expecting a bounce back at some point, we remain Neutral.

EM Equities – pick your winners carefully

Depreciation of the Chinese yuan sees its onshore value at the lowest point since the GFC – i.e., 2008. This reflects a strong USD, Covid restrictions, divergent interest rate policies and low domestic CPI at 2.5%. The bottom line here, is that weak domestic demand is limiting Chinese firms’ ability to pass on higher prices. Domestic demand remains subdued and industrial profit growth contracted for the second consecutive month in August, falling 2.1% in the first eight months of the year. Policymakers will continue to ease domestic policy to reflate the economy and the PBoC will probably cut rates further.

Elsewhere, global semiconductor demand has fallen back in a post Covid world and improved inventories and thus will keep Taiwanese and South Korean markets under pressure. Brazil has been somewhat a star with strong GDP and interest rate dynamics and Latin markets were up 3.6% over the Quarter as Argentina starred at +57.3%. India remains attractive but flows by Australian investors into this market remains low.

EM remains a mixed bag and with a strong USD and the China story providing a lot of the headwinds, we retain a Neutral stance.

Property – disciplined allocation required

The listed property sector has been a big asset underperformer. The strong rise in bond yields has been the main culprit as this is the main determinant in deciding what rate to price commercial real estate at. Coupled with the fear of a recession we saw the S&P ASX 200 AREIT index slipping -6.7% for the quarter cementing a -21.5% for the 12-month period. Whist property is often flagged as being Inflation proof the market is struggling with the sheer rapidity and magnitude of rate rises.

There is a plethora of competing forces here i.e., replacement cost, occupancy forecasts, post Covid office and retail trends, supply factors, immigration, rising interest rates etc. Investors should retain preference for ‘A’ grade properties..

We see property as an attractive longer term asset class. Until we have a clear view on the level of terminal Interest rates, we remain defensive and hence Neutral.


Gold under pressure, be patient          

Gold has struggled in the face of the all- powerful USD. Speculation is that there has been some central banks selling as a funding mechanism to support FX activity through currency support. We retain for its innate ability to be a strong performer on a weaker USD and role in geo-political insurance.

Hedge Funds – right environment requires right vehicle

Given the heading captures a disparate range of funds and styles, we need to ensure we are in the right vehicles with the right themes. Preference is to market neutral funds, long-short strategies with associated skills and track records as well as commodity and trend following strategies.

Infrastructure – good run now crimped

Whilst we have seen a flood of money into Infrastructure with CPI structurally adjusting revenue streams, the sharp rise in rates across heavy geared balance sheets has seen a quarter of underperformance.

Private Equitygravity will impose

At some point PE valuations will need to address the price developments in the listed market. We highlighted this last quarter and now re-emphasise that PE valuations will be brought down by listed market comparable. We down weight our exposure to PE to Neutral.

Fixed Income:

Government Credit – the Rate-hikers guide to the galaxy

We concluded our last quarterly with ‘Government bonds become more attractive, currently paying a 3.25% yield up from a 1.5% yield 12 months ago.’

The same 10-year Australian government bonds are now paying 3.9% a quarter later. In hindsight we leant back into duration a little too early pressure and rising interest rates.

We are now better rewarded with this level of return and in this economic environment we now see reason to reduce our negative view on duration bonds and move the portfolio setting back to neutral. This infers that our view is that we will start to see a peak in inflation heading into the start of the new year and the potential for yields to drop thereafter.

September saw the Fed deliver its third consecutive 75bp rate increase and revised its projections to show that another 125bps of rate hikes are likely this year and that policy will continue to tighten in 2023.

Fed Funds Rate Expectation

Source: BCA Research

Elsewhere, the Bank of England and Swiss National Bank lifted rates by 50bps and 75bps, respectively. Not to mention rate increases in Norway, South Africa, Indonesia, the Philippines, and Taiwan. Global financial markets responded poorly to this synchronised tightening with equities selling off and bond yields rising across the world.

Move to Neutral, yields are now attractive but CBs are not done yet.


Credit has been a favourable and rewarding asset class to be invested over the recent quarters and given the greater uncertainty in global markets a wider range of outcomes are now emerging in credit markets.

A big driver of ‘credit health’ is the balance sheet that credit is being lent to. As we see rising costs (inflationary) and central bank responses (lifting interest rates) both corporate and consumer balances sheets are tightening. This means lower quality credit opportunities should be avoided as greater risk is present.

Greater individual risk (idiosyncratic) is also occurring; therefore, loan documentation and capital structures need extra diligence to ensure the full understanding of the investments particularly if we see economic growth decline.

Overall, we retain our neutral view on credit with a vigilant ‘risk increasing’ bias.

For further information and guidance, please contact us here.

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