Market and Asset Allocation Update – September 2024

September 2024

“We don’t have to be smarter than the rest – We have to be more disciplined” – Warren Buffet.

Market and Asset Class Views

Thoughts

Australian Equities

A reporting season with enough good hits to satiate the bulls? Takeaway – Corporate discipline remains robust. That’s all fine, but the outlook remains more uncertain with headwinds (soft GDP, defensive consumer, sticky inflation etc). So, with lower growth, mildly expensive valuations and less promising outlook, we move to mild Underweight. Staying U/W on Financials and Resources and Neutral on Industrials. Target for re-entry on the ASX200 is 7550.

US Equities

Last Quarter we were not strong in conviction in taking money off the table. We are now. A 18.4% YTD return in the S&P500 require some “banking”. Equity markets are juiced by lower inflation and prospects of lower rates. However, this is countered by poor PMIs and housing metrics, deteriorating employment factors and poor consumer confidence. Sectorally, we favour Healthcare, Utilities and Consumer staples and tilt away from Energy and Consumer discretionary. Equal Weight for Large Caps. We downgrade Small Caps allocation but retain a neutral exposure. US “Exceptionalism” may lead to a semipermanent
valuation gap vs. the ROW but for now, “mind the Gap”. Target on the S&P 500 is 5325.

European Equities

Economically, less robust than the US and with Core CPI at 2.8% further rate cuts are on the way. Cheap, however it’s a lower and slower story with the best value lying with the UK market which is leading the way on most economic indicators. We were Neutral, now underweight.

Emerging Markets

It’s all about China, which continues its struggle to get to 5% growth. It’s all about manufacturing and exports. We remain defensive for the EM call and tip over from Neutral to Underweight.

Property

A rally in listed REIT has brough the bulls out with the “it’s time to buy”. However, impending softer macro factors and rolling lower revaluations will suppress. Hold quality stories. Unlisted opportunities are getting more attractive, but we remain very selective. CRE debt still better priced than CRE Equity.

Infrastructure

Second upgrade in consecutive quarters, buoyed by falling rates and defensive qualities albeit with some correlation to expected softening to listed equity markets. Move to mild Overweight.

Gold

Structurally, we continue to like the story as Central Bank buying, fiat currency factors, Geopolitics and lower interest rates/inflation provide solid long-term support. Tilted 2X on SAA settings.

Government Bonds

Continuing to hold the overweight on government bonds as a defensive ballast for the portfolio. Splitting the curve into 3, we see good value in the short and mid curve and are a milder overweight on the Ultras/Long End (i.e. 30 years in the US). The risk here is that the market is already pricing 200bps in rate cuts. The market now wants a term premium for the long end, so expect a normal curve. We see Investment grade credit as being a reasonable place to park funds (lightening Equities) as a better risk adjusted reward – higher yield bonds have more correlation with equities – Corporate Bonds correlate more with Treasuries/Gov Bonds.

Private Credit

Lots of headlines on the risks, but the sector provides plenty of reward for those who spend time to differentiate their investments. Though some of the credit metrics are softening, this is from historically (Covid funded) levels.

Cash

With falling inflation cash is now generating positive real returns. This is in addition to zero volatility, defensiveness and optionality and immediate liquidity for deployment. Overweight X 2.


For further information and guidance, please contact us here.

DAA Calls enclosed proposed are for general investment purposes. Please discuss with Carnbrea the suitability of any recommendation to portfolios and the context of client SAA construct, holdings, return analysis and tax consideration. This document has been prepared and issued by Carnbrea & Co Limited ABN 33 004 739 655 (‘Carnbrea’), Australian Financial Services Licence No 233763. Any advice included in this document is general in nature and does not consider your objectives, financial situation or needs. Before acting on the advice, you should consider whether it’s appropriate to you. If a product we recommend has a Product Disclosure Statement (PDS), you should read it before making a decision. Past performance is not a reliable indicator of future performance. Derivatives are leveraged products which means gains and losses are magnified, and you may lose substantially more than your initial investment. We do not endorse any information from research providers that we provide to you unless we specifically say so. Copyright © | 2024 |Carnbrea & Co.| All rights reserved                 

Market and Asset Allocation Update – May 2024

May 2024

“You can’t control the wind – but you can adjust your sails” – Proverb.

Market and Asset Class Views

Thoughts

Australian Equities

What’s not to like about the Oz Equity market? Not much – it’s just not cheap enough. The index has continued its run with liquidity, lack of bad news, less than tight monetary policy and benign fiscal policy. We would like a good pull back (say 10%+) with an ASX 200 at 7150/7200 as a re-entry point. Tactically, we lighten here (7850) and would reduce further at 7950. Look to Small/mid-caps.

US Equities

Equity markets in the US have now touched on the “expensive” end of the value spectrum. The Citigroup equity Levkovich sentiment index, touched “euphoria” territory recently. We wind back on the momentum trade that we successfully kept in place for the last quarter. “Bank it” yes – “Underweight”? – not yet – not brave enough. This market also needs a refreshing correction. Continue re-allocating to equal weighted exposures and ex S&P 500 as a preference. Exceptionalism maybe for longer – not forever.

European Equities

The ECB will be the first to cut rates, but this is a reflection on economic outlook (GDP at 1% vs US 2%+) as much as lower inflation. Every metric vs the US shows value. Cheap – yes, but with better prospects elsewhere. But we are Neutral, so we participate at LT SAA settings.

Emerging Markets

The recently announced China property rescue package is fine, but not enough to make a substantial dent in China’s property woes. We missed the sharp bear market rally (but we were Neutral). Some positives in other EM data releases but not enough to budge off Neutral.

Property

The unlisted space will continue to experience a rolling series of valuation downgrades. Preference is for listed exposure. Unchanged. Higher for longer rates will see rolling NAV adjustments.

Infrastructure

A mixed bag. We like the thematic and the asset class was cheap, Managers are still anticipating 10 yr US treasuries coming back to 3.75% to alleviate exposure to heavily geared assets. Recent softer CPI figures are supportive. Electrification and Greenification trends are also tail winds for assets in this space. Upgrade from Underweight to Neutral but not a high conviction call.

Gold

We continue the hold a bigger overweight position as the current run is not done yet. The East is investing (with focus on the Chinese authorities) and the West is divesting (Retail). It is/will be volatile. We also like Silver (high beta Gold) and Copper (Supply constraints and Greenification) on retracements.

Government Bonds

We continue to hold the mild overweight on long duration government bonds. Best value may be in the mid part of the curve. The long end may not rally as far as people think. If we take the rule of thumb that the pricing mechanism for LT bonds, is either GDP +2.0% or Inflation rate +2.0% = “fair value” range for the 10 yr of 4.25 to 4.75%. We see Investment grade credit as being expensive in the US, but cheaper here in Aust. Spreads are tight on outright yield buying. Therefore, we still prefer to allocate to Gov’ts for duration reward and to Private Credit for a better running yield (blended portfolio return. (barbell)

Private Credit

Again, the trick with Private Credit is to receive a good yield while keeping credit risk low. Overall, a benign environment, despite some increase in defaults in some of the markets’ demographic strata. We remain comfortable in harvesting the complexity and liquidity premia on offer. In Mortgage loans, we step back to a strong to mild overweight as the credit cycle gets longer in the tooth.

Cash

Unless the data diverges significantly, we expect CBs in Aus, UK and US to be locked at the current rates until 2025, also aiming to be small targets in noisy election environments. Love to cut – but they can’t.


For further information and guidance, please contact us here.

DAA Calls enclosed proposed are for general investment purposes. Please discuss with Carnbrea the suitability of any recommendation to portfolios and the context of client SAA construct, holdings, return analysis and tax consideration. This document has been prepared and issued by Carnbrea & Co Limited ABN 33 004 739 655 (‘Carnbrea’), Australian Financial Services Licence No 233763. Any advice included in this document is general in nature and does not consider your objectives, financial situation or needs. Before acting on the advice, you should consider whether it’s appropriate to you. If a product we recommend has a Product Disclosure Statement (PDS), you should read it before making a decision. Past performance is not a reliable indicator of future performance. Derivatives are leveraged products which means gains and losses are magnified, and you may lose substantially more than your initial investment. We do not endorse any information from research providers that we provide to you unless we specifically say so. Copyright © | 2024 |Carnbrea & Co.| All rights reserved                 

Market and Asset Allocation Update – February 2024

February 2024

“You can’t control the wind – but you can adjust your sails” – Proverb.

Market and Asset Class Views

Thoughts

Australian Equities

Noting that we are happy with our longer-term allocation, we see the current market as a little overcooked. China sneezes and we go up! Superficially, we are still seeing strong numbers, but the economy is uneven in its outlook. At the time of writing, the index is at 7650, and is at the upper end of our target 7600/7700 level. We are targeting a top-up at the 7300 level on any prospective pullback. Small Caps remain at the very cheap end. We allocate, but we recognise that we may not be instantly rewarded.

US Equities

What sort of landing do you believe in? Given the complete failure of forecasts last year, what
do we believe? Well, the story will be in the “long and variable lags”. The whole Covid dynamic has elongated the negative impact of higher rates as both Corporate and Consumers locked in long dated debt when money was cheap. We are seeing some softening emerging in the US Economy and our call is purely a function of the most benign scenario being forecast by the market. So, we ride the momentum wave that is the Magnificent Seven/Six but start allocating more to Small/mid cap stocks and equal weighted vehicles.

European Equities

With no economic growth, Germany in recession and high real interest rates our confidence in a recessionary call in Europe is much greater. They ECB will be the first to cut rates to remedy this. On every metric the market is cheap, but being a value play with no momentum sees us underweight.

Emerging Markets

What ails China is well known. Debt, Deflation and Demographics. A market PE ratio of 9X is tempting, but…. The remaining wider EM market fundaments are ok. Our call is on balance, neutral.

Property

A bifurcation here as we see the listed REIT space as being cheap as everything got discounted both heavily and quickly. They now offer value. The unlisted space will continue to experience a rolling series of valuation downgrades. Preference is for listed exposure.

Infrastructure

Despite being everyone’s darling, last year was tough for Infrastructure as higher rates caused valuation issues and heavily geared firms faced a much higher interest rate bill. We move to underweight in part due to a lack of catalysts as well as monies better spent elsewhere.

Gold

We have moved to a bigger overweight position as we see more tail winds emerging. A weaker USD (not quite yet), falling Interest rates, Central bank buying, and Geo-political tensions are supportive.

Government Bonds

We continue to be mild overweight on long duration government bonds and see the market as finely balanced with counteracting forces (falling cash rates vs. increased supply etc.). However, as a recession hedge, we main overweight and accumulating positions in sell offs (i.e. 10 years above 4.10%. We see Investment grade credit as being expensive in US, but cheaper here in Aust. However, we prefer to allocate to Gov’ts for duration or to Private Credit for better risk adjusted margins.

Private Credit

The trick with Private Credit is to receive a good yield while keeping credit risk low. So, we don’t want to be overpaying for credit risk. Our rationale is that we see a stronger economy than expected, falling cyclical risk, expected rate cuts and high outright yields. Until we see a variance to these factors, we are happy to be overweight. Yes, we have risk in Private Credit, but we are being paid for it.

Cash

We expect cash and TD rates to remain at this level for longer than what the market expects. It will play its expected role offering an acceptable return for liquidity.


For further information and guidance, please contact us here.

DAA Calls enclosed proposed are for general investment purposes. Please discuss with Carnbrea the suitability of any recommendation to portfolios and the context of client SAA construct, holdings, return analysis and tax consideration. This document has been prepared and issued by Carnbrea & Co Limited ABN 33 004 739 655 (‘Carnbrea’), Australian Financial Services Licence No 233763. Any advice included in this document is general in nature and does not consider your objectives, financial situation or needs. Before acting on the advice, you should consider whether it’s appropriate to you. If a product we recommend has a Product Disclosure Statement (PDS), you should read it before making a decision. Past performance is not a reliable indicator of future performance. Derivatives are leveraged products which means gains and losses are magnified, and you may lose substantially more than your initial investment. We do not endorse any information from research providers that we provide to you unless we specifically say so. Copyright © | 2024 |Carnbrea & Co.| All rights reserved                 

Quarterly Market Update – Q3 2023

June Quarter 2023

Market and Asset Class Views

Overall

Jay Powell and the deferral of destiny

We have spent the last quarter observing market pundits calling out an immediate major softening in global economic conditions. As rates have ramped up in all Developed Economies, surely the price to pay was weaker economic growth? Despite the impending doom, equity markets have made substantial gains led by the US. This gain is also surprising given treasury markets have stepped back from forecasting an immediate exercising of the “Powell Put” and falling rates but have now started to bake in a higher-for-longer interest rate outlook.


We do expect a downturn in equity markets – something will get broken – timing and magnitude unknown, but not yet. Importantly, excess liquidity is underpinning risk markets, and this will continue in the short term – i.e., for the next quarter. But the higher rates go, the more certainty we have that something will break in risk markets. We have become inveterate watchers of 2 indicators – inflation and unemployment. Perhaps market liquidity is the best indicator of impending “breakage”?


In the big picture calls, we look to take some risk exposure out of Equity markets and dial into longer duration Treasury and Corporate investment grade Bonds and Alternatives.


Australian Equities: After leaning in – we now lean-out…a bit.

Our last call on Australian Equities was to “lean in a little”. It proved to be a good call, but we should have leant in a little more.


As noted in our previous quarterly, the Australian market remains one of the cleaner stories globally. We have both trade and fiscal surpluses, relatively free from geo-political risk, political stability and a more benevolent inflation, interest rate and economic growth mix. The dark cloud on the economic front, is the China dynamic. This variable will drive relative over or underperformance in Australian markets. Commodity markets are pinning their hopes on a major stimulus. If it happens, it will be a sugar hit for equities, but its duration will be limited.


Sector specific, we retain an overweight to Commodities (option on China and inflation), underweight consumer facing financials and Discretionary retail. We also remain overweight more defensive sectors such as Healthcare, Infrastructure and Consumer Staples.


We expect the ASX 200 to remain range bound and are happy to tilt longer on pullbacks in the 7000 range and lighten at the top of the range i.e., above 7400.

Our preferred equity exposure – but move back to Neutral.

US Equities – Bubble, Bubble Toil and (AI) Trouble?

Indeed, it was a strong quarter with the S&P 500 Total return index generating +8.3%. One of the major concerns has been the lack of breadth in this US market rally. June did see a wider participation, however the heavy lifting since Xmas has been in the AI/FANGS/Magnificent 7 thematic. Further illustration on the market lop-sidedness is in the US Small Cap sector running at a 20% discount to the Large Caps on price and a 50% discount on valuation (Goldmans).

The US consumer is remarkably resilient, but we all have underestimated 1. How much accumulated savings had been built up over Covid 2. robust employment market 3. robust Housing market (no-one wants to move). 4. partial QT reversal with liquidity being pumped in to stabilise the banking sector over the quarter.

Forward indicators are starting to weaken, but not to the point where the Fed will halt their tightening cycle. The Fed still faces Buoyant Property, Equity and Employment markets. 

One of the market’s favourite maxims is “Don’t fight the Fed” – yet the Equity market is doing just that. The US stock market trades on 19X forward PE earnings on this is on the back of PE multiple expansion than real earnings increases. Analysts have a baked-in 12% earnings growth over the next 12 months. The market yield earning lower than bonds and certainly cash at 5%.

We won’t get the timing right and the momentum trade is seductive, but we start now and in a disciplined fashion, our preference here is for the following portfolio adjustments.

  1. Lighten outright US exposure. (weighted towards the end of the quarter)
  2. Some rebalancing from large cap weightings into Equal weighted vehicles.
  3. Some rebalancing from large cap into small cap exposures.

The risk of a correction – whether fast or slow – is now higher. We move to Mild Underweight.


EU Equities – Still cheap – and it will get cheaper.

A flat quarter for European equities with the market returning +0.89% but saw the 12 months return still healthy at +13.46%

The Euro is facing a tightening cycle almost as steep as the US, but with far less economic capacity and flexibility to accommodate. We cannot see how the EU provides a more attractive proposition than other markets. It thematic as a “value” play has now passed as the baton is past back to the Growth story represented through AI. It is likely that the EU will be an accelerated version of the US, i.e., tightened later but will cut sooner.

The biggest economy, Germany, is now in a technical recession. The question is will that spread to other EU countries. In analysing Germany in isolation there 3 things to know 1. It outsourced its defence to the US 2. Outsourced its Energy policy to Russia and 3. Outsourced its Economic Growth to China. Of course, you could substitute Australia for 2 of these.

Whilst the EU is still cheap to the US, it’s for a very good reason. We move to Underweight.


EM Equities – it’s all about China (again)

Déjà vu – As discussed earlier, China still looms as the big unknown. The anticipated major domestic economic lift due to the reopening trade has been disappointing. GDP forecasts, PMI’s, PPI’s continue to be lowered, interest rates are being cut however the spectre of a Taiwan invasion has receded. The market is anticipating a classic Chinese policy response (big centrally driven spend in Infrastructure etc) and, when delivered, will give markets a shot in the arm. However, China’s structural problems such as Property remain unresolved and its major trading partners are slowly falling (or have fallen) into recession territory.

Counteracting this partially is a more robust Japan. Though not an EM economy itself, its linkages to the rest of Asia remain important. This will not be enough for us to gain our confidence to reweight.

EM outlook will be dominated by China. With such uncertainty we reduce our weighting to Negative.


Property – Value starting to build – but in the Australian listed space.

We need here to delineate between Private Commercial Real Estate (CRE) markets and it’s listed sibling. The view here is that, over the next quarter or two, we will continue to see pressure on revaluations and liquidity in both private and public portfolios. The difference here is that the Publicly listed space has already seen a heavy discounting in equity values and many places remains “cheap” especially on a “cost to replace” basis.

Recent US Bank stress testing showed that small and mid-sized banks hold some 80% of Bank held CRE exposure. They have been tightening their lending criteria substantially as Interest Coverage ratios get pressured by rising rates. Anecdotal evidence suggest Australian banks are doing the same.

We retain a Neutral Property with a strong preference for AREITs over IREITs but would be underweight Unlisted vehicles in both geographies for the next six months.


Alternatives:

Gold Small trinket buying.          

Gold has played its role over the 12 months but has given back a bit in performance this quarter. Rising real rates coupled with a stronger USD have been the main cause. Gold remains s a core part of uncorrelated asset holdings. Given the recent pullback we increase our allocation.

Hedge FundsDriving the right vehicle.

For a longer investment horizon, we have a continued preference for real asset funds, agricultural, timber, commodity etc. Trend following funds have had a good run of late but as we see markets breaking down later in the quarter we look to lighten. Global Macro should continue to perform.

Infrastructure – Crowded Trade?

We continue to see strong preference to investing here. Buyers have a range of reasons (CPI linked inflation hedge, Defensive Qualities in Asset portfolios, usually have real tangible assets. We continue to look to allocate at SAA levels.

Private Equity It’s still equity.

Much has been written about the impasse between listed equity markets and private equity and their respective valuations. As the private space continues to grow at the expense of public, this is forming a key part of the premium and may be justified. We revert to Neutral from underweight and allocate at SAA targets.


Fixed Income:

Government Credit – bonds are back in town

We increase our allocation to quality Fixed income. We are now rewarded on an out-right risk-free yields of 4.0% for most of the curve, both here and Australia.

Whilst remaining in cash produces a similar yield in the short term, if we see inflation fall there will be a quick adjustment in yields across the curve back to 3.25%. To support this view, we must believe that inflation has peaked, but the attraction is resultant capital gains on bonds will also and adding to the out-right yield return, some 10% +.

We will get more aggressive when the data validates our view. The running yield and

We favourable lift our government bond allocation by 0.5+ to +1

Credit: Credit where credit is due.

We expect some bifurcation in US credit markets where.

  • Weaker credits will start to face a refinancing wall as fixed rates obtained during Covid are now required to be rolled over at much higher rates. Floating rates are likely to remain higher, for longer, putting more strain on borrower balance sheets. A tepid economy and tighter bank lending standards won’t help.
  • Investment Grade (IG) credits should remain in good shape. Most here have market pricing power in passing through costs and access to equity markets. Also, most are fixed rate, so a long duration profile will assist or view.

Similar story for Australia, however here we are more discerning/granular in our view.

  • Real Estate Debt secured by first mortgage has the right combination of return, realistic valuations and covenants.
  • RMBS books will need monitoring as retail mortgages become stressed.
  • Corporate debt will follow the same themes as per the US above.
  • Consumer Debt will also require monitoring with the employment rate being the macro variable to watch.

We retain our Neutral call on Credit, +ve for IG and -ve for Sub Prime.


For further information and guidance, please contact us here.

DAA Calls enclosed proposed are for general investment purposes. Please discuss with Carnbrea the suitability of any recommendation to portfolios and the context of client SAA construct, holdings, return analysis and tax consideration. This document has been prepared and issued by Carnbrea & Co Limited ABN 33 004 739 655 (‘Carnbrea’), Australian Financial Services Licence No 233763. Any advice included in this document is general in nature and does not take into account your objectives, financial situation or needs. Before acting on the advice, you should consider whether it’s appropriate to you. If a product we recommend has a Product Disclosure Statement (PDS), you should read it before making a decision. Past performance is not a reliable indicator of future performance. Derivatives are leveraged products which means gains and losses are magnified and you may lose substantially more than your initial investment. We do not endorse any information from research providers that we provide to you, unless we specifically say so.                   

October 2022 Monthly CiN-sights

Markets continued to fall over September as rate rises were delivered over the month. The expectations of rate hikes in the near future also sparked the acceptance that a global recession has a high probability of occurring as the fight to temper inflation continues. With the UK in a state of economic flux, and no end in sight with the war in the Ukraine, there remains a deep uncertainty as to what lies ahead.

Global Inflation and Interest Rates

In Australia, the Reserve Bank’s (RBA) fight against inflation continued over September with another rate hike of 50 basis points delivered to take the cash rate to 2.35% – the highest rate since January 2015. The RBA has taken a two-pronged approach to fighting inflation – raising rates and talking tough on its commitment to quell inflation.

By month end, the RBA had tightened by a total of 225 basis points since it began this rate-hiking cycle in early May – the most tightening in a 5-month window since late 1994, which underscores the inflation challenge the RBA is taking on.

Inflation was running at an annual rate of 6.1% in the June quarter and is forecast to hit close to 8% in the final quarter of this year on the RBA’s own forecasts. Price pressures of this magnitude mean that getting inflation down will not be easy.

Not surprisingly, the RBA has signalled more rate increases are on the way. The final paragraph of its statement on the 6th of September highlighted “the Board expects to increase interest rates further over the months ahead”. The question boils down to how much more tightening can we expect.

Fighting inflation comes with a trade-off to growth. But the RBA sees inflation as the bigger evil. The trade-off in fighting inflation is one that involves balancing an economic outlook hampered by growing costs and labour shortages against the vulnerability of heavily indebted households. One of the major sources of uncertainty is the behaviour of household spending. Consumer confidence has fallen, house prices are declining, and the “full effects of higher interest rates (are) yet to be felt in mortgage payments”. But people are finding jobs, hours worked are increasing, wages growth is rising, and many households continue to build up financial buffers.

A key feature of what we are seeing across the economic landscape globally has been the synchronised nature of monetary policy tightening as the fight against inflation continues. As a result, during this cycle, central banks in the US, Euro area, and Canada have all announced and implemented super-sized interest rates hikes over recent months.

Focussing on the US, the Fed has been hiking rates aggressively through 2022 to get a handle on rapid inflation in the US economy and rising inflationary expectations.

Throughout 2022, the Federal Funds Rate has been lifted by 225 basis points, from a target band of 0.00% – 0.25%, to 2.25% – 2.50%. This has occurred at a rapid pace, with hikes of 50, 75, and 75 basis points – then at the September Fed meeting a further 75 basis points. This now takes the federal funds rate to the 3%-3.25% range, pushing borrowing costs to the highest point since 2008.

Following the rate rise, Fed chair J Powell during a press conference stated, “We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t”.

The annual inflation rate in the Euro Area jumped to 10% in September of 2022 from 9.1% in August, the highest it has ever been in the history of the common European currency. This result compared with market forecasts of 9.7%.

It marks the fifth consecutive month of rising inflation, with prices showing no signs of peaking, at a time when pressures already spread from energy to other items. The faster price increases were seen for food, alcohol and tobacco, energy, non-energy industrial goods and services. Among the bloc’s biggest economies, Germany recorded the highest inflation rate (10.9% vs 8.8% in August), followed by Italy (9.5% vs 9.1%) while inflation in both Spain (9.3% vs 10.5%) and France (6.2% vs 6.6%) slowed.

Developments in the global economy

Australia

In early September, the Federal Government’s Jobs and Skills Summit took place, which included two days of speeches and discussions with industry, government, unions, and business leaders.

The Government announced 36 outcomes and initiatives that would be implemented following the Summit. These are grouped into five key themes and categories:

  • A better skilled, better trained workforce.
  • Addressing skills shortages and strengthening the migration system.
  • Boosting job security and wages, and creating safe, fair and productive workplaces.
  • Promoting equal opportunities and reducing barries to employment.
  • Maximising jobs and opportunities in our industries and communities.

One of the main policies coming out of the Summit included changes to the migration program to accelerate and increase the number of people coming to Australia to help employers fill the record number of job vacancies across the economy.

For permanent migrants, the annual intake will be increased to 195,000 in 2022-23, up from 160,000 prior to the pandemic. Additional funding will be provided to speed up visa processing to streamline the visa application process and clear backlogs. Students and holders of training visas will also be allowed to stay in Australia longer, with work rights, following the completion of their studies.

On industrial relations, changes will be introduced to the Fair Work Act and rules around workplace bargaining, including the development of legislation to introduce a multi-employer wage bargaining system. This has been a contentious issue as some employer groups have argued that such a move may lead to excessive wage claims and increased risks of industrial action at a time when inflation is elevated. Additional changes include simplifying the ‘Better Off Overall Test’, which employers have previously flagged as a challenge to negotiating new agreements.

On skills and training, more funding will be allocated for a range of education initiatives. An additional $1 billion of funding will be provided by the Federal Government and state and territory governments to provide an additional 465,000 fee-free TAFE places, with 180,000 in 2023.

There were additional changes announced to encourage greater levels of workforce participation, particularly among older workers and women. This included increasing the amount of income that pensioners can earn before their pension entitlements begin to be reduced. There were also announcements around strengthening reporting standards on the gender pay gap and reporting and targets around gender equality in the workplace for larger businesses and the public service.

The Government has hailed the Summit as a success. However, the proof will be in the pudding. Focus will now turn to the communication and implementation of the large range of policies announced. Some announcements will require consultation and collaboration with the public and key stakeholders as legislative changes need to be brought forward to Parliament to give them effect. Submissions from and engagement with the public are expected over the next 12 months.

Another big piece of economic news was the release of the National Accounts mid-September which showed that the economy expanded by 0.9% in the June quarter and by 3.6% over the year to the June quarter, confirming the RBA’s view that the economy remains strong.

Propelling the economic engine forward was household spending (up 2.2% over the quarter) and exports (up 5.5%). Households splashed out on services, such as airline travel, hotels, cafes & restaurants, and recreation & culture. These sectors had been at the coalface of closed borders and mobility restrictions. They’re also likely to be the first to start feeling the squeeze from higher mortgage rates.

The one area where higher interest rates are beginning to take their toll is the housing market. The National Accounts showed that housing construction declined by 2.9% in the June quarter, and by 4.6% in annual terms. Forward indicators, most notably building approvals, suggests that the pipeline of projects has peaked, and we should expect a continued easing in activity.

The August 2022 read had consumer confidence well entrenched in negative territory. The consumer sentiment index had fallen for a ninth consecutive month, sliding to 81.2 points. This was the lowest reading since August 2020 and was around the lows recorded during the Global Financial Crisis.

On balance, the negative effects are likely to outweigh the positive offsets and continue to weigh on confidence. A key uncertainty remains how far confidence will fall before hitting a trough.

While confidence is low, consumers continue to spend big. We expect this anomaly to eventually correct itself with the headwinds from rising cost-of-living pressures and higher interest rates to lead to a slowdown in household consumption, particularly as we head into 2023.

United States

US stocks were highly volatile over September as investors digested a slew of economic releases. The Fed’s preferred inflation measure, the US core PCE price index, came in well above expectations in August, worrying investors that inflation may be stickier than anticipated. In addition, a report from the US Commerce Department showed that personal spending rebounded in August, pointing to a still resilient economy.

All major US indices finished the month with three straight quarters of decline. For the S&P this is the first time since 2009, and for the Nasdaq since the dot-com bubble.

The dollar index steadied near 112 around September close, after retreating from a 20-year high of 114.778 over the month – another strong monthly gain on expectations that the Federal Reserve will tighten monetary settings further to bring down high inflation.

The index finished up about 3% over the month and is trading nearly 7% higher for the quarter. Fed policymakers reiterated that the central bank needs to raise interest rates to restrictive levels amid persistent inflationary pressures, despite concerns about growth and market volatility. The $USD also benefited from increased haven demand given the US economy’s strength relative to other developed nations.

Other data released over September was the personal consumption expenditure price index which rose 0.3% month-over-month in August of 2022, after a 0.1% decrease in July. Prices for services increased 0.6%, after being unchanged in July while the cost of goods decreased 0.3%, extending a 0.4% drop, reflecting a shift in spending. Food prices increased 0.8% (vs 1.3%) while energy prices tumbled 5.5% (vs -4.9%). Excluding food and energy, the PCE price index advanced 0.6%, faster than market expectations of a 0.5% rise, suggesting inflation is becoming more entrenched in the economy.

The S&P Global US Manufacturing PMI was revised higher to 52 in September of 2022 from a preliminary of 51.8 and above 51.5 in August.

Still, the reading pointed to subdued operating conditions although output and new orders returned to growth. Nonetheless, firms expanded their workforce numbers at the fastest pace since March 2022, although labour shortages continued to hamper firms’ ability to work through incoming new orders.

Outstanding business rose again and at a quicker rate. At the same time, cost pressures softened amid reports of lower prices for some inputs. Although slower than those seen earlier in the year, the rate of selling price inflation picked up slightly as firms continued to pass-through higher cost burdens to customers.

Asia

China’s currency woes continued over September, albeit the yuan significantly strengthened to 7.1 per USD as the month closed after Chinese state media emphasised that the currency is unlikely to depreciate further.

The move was consistent with the People’s Bank of China’s (PBoC) warning against speculative trading, delivering clear verbal interventions to support the yuan amid its plunge against the dollar. The PBoC also raised the foreign exchange risk reserves for financial institutions when purchasing FX through currency forwards to 20% from the previous level of zero starting on Sept. 28th, making it more expensive to bet against the domestic currency. Either way, as the month closed, the yuan fell to 7.26 per USD, its lowest level since the data first became available in 2011, and is set to drop for the seventh straight month as China’s monetary policy diverges with the US and as a gloomy domestic economic outlook dented sentiment further.

Data supporting China’s economic slowdown was underpinned by the official NBS Non-Manufacturing PMI declining to a four-month low of 50.6 in September 2022 from 52.6 a month earlier, reflecting the impact of hot weather and anti-COVID measures.

Both new orders (43.1 vs 49.8 in August) and foreign sales (46.0 vs 48.9) fell for the third month in a row and at a much steeper rate, while employment continued to drop (46.6 vs 46.8).

On inflation, input costs stabilised for the second straight month, with the index being unchanged from August (at 50); while output prices dropped for the sixth month in a row, with the rate of decrease softening slightly (48.2 vs 47.6).

Japanese industrial production rose by 2.7% month-over-month in August 2022, accelerating from an upwardly revised 0.8% growth a month earlier and easily beating market consensus of 0.2%, data showed. This was the third straight month of an increase in industrial output, mainly contributed to by production machinery (6.1% vs 6.0% in July), iron, steel, and non-ferrous metals (3.6% vs -1.6%), and chemicals (2.7% vs -4.8%). On a yearly basis, industrial output grew by 5.1% in August, reversing from a 2.0% drop in July and increasing for the first time in six months.

The au Jibun Bank Japan Manufacturing PMI was at 50.8 in September 2022, compared to the flash reading of 51.0 and after a final 51.5 in August. This was the softest growth in factory activity since a drop in January 2021, due to rising inflation and a slump in the yen.

New orders fell the most in two years amid weaker demand from foreign markets, particularly China, South Korea, Europe, and the US.

Also, output shrank for the third consecutive month, with the rate of fall the fastest in a year; and buying levels contracted further.

The consumer confidence index in Japan declined to 30.8 in September of 2022 from August’s 3-month high of 32.5, amid lingering global economic uncertainty. All sub-indexes deteriorated: ‘employment perceptions’ (down 1.7 points from a month earlier to 35.4), the measure of ‘overall likelihood’ (down 2.1 points to 29.0), views toward income growth (down 0.6 points to 35.4), and willingness to buy durable goods (down 2.5 points to 23.5).

Europe

The economic sentiment indicator in the Euro Area slumped 3.6 points from a month earlier to 93.7 in September 2022, the lowest level since November 2020 and below market expectations of 95.0, amid concerns over rising inflation and interest rates, as well as a weakening economic outlook and an intensifying energy crisis due to the war in Ukraine.

There were declines in confidence among consumers (-28.8 vs -25.0 in August), retailers (-8.4 vs -6.5), service providers (4.9 vs 8.1), manufacturers (-0.4 vs 1.0), and constructors (1.6 vs 3.4). On the price front, the inflation expectations index rose to 41.3 from 37.0 a month earlier, while the gauge for selling price expectations among manufacturers increased to 50.3 from 44.6. Amongst the largest EU economies, the ESI fell markedly in Germany (-4.8 points), the Netherlands (-3.7 points), Italy (-3.7 points), France (-3.2 points) and, to a lesser extent, Spain (-1.0 points).

Adding to the Euro region’s economic slump, the euro continued to fall toward US$0.95 in late September, a fresh low in 20 years. It is down almost 20% so far on the year, pressured by a stronger dollar as the Fed continues to deliver its big interest rate hikes, and as recession prospects in Europe are increasing due to the energy crisis.

Meanwhile, the European Central Bank (ECB) already started the tightening cycle by raising key interest rates by 125 basis points since July and pledging to continue to increase the borrowing cost as inflation shows no signs of peaking. ECB President Lagarde recently reinforced that the central bank must keep raising interest rates to tame inflation, even if the side effect of the tighter policy will be weaker growth, while several ECB members recently advocated another 75 basis point hike in October.

On a more positive note, the Euro region unemployment rate was unchanged at 6.6% for a second consecutive month in August of 2022, a record low reading and in line with market forecasts.

A year earlier, the jobless rate was much higher at 7.5%. There were 10.966 million unemployed persons, down by 30 thousand from July 2022. Youth unemployment also declined by 17 thousand to 2.136 million, pushing the rate down to 13.9% from 14.0% in July. Among the biggest economies in the Eurozone, declines in the jobless rate were seen in France (7.3% vs 7.4%) and Italy (7.8% vs 7.9%) while the jobless rate was steady at 3.0% in Germany.

Over to the UK, news that shocked global markets was the panic selling across UK’s markets which saw the 10-year’s yield note topping 4.5% for the first time since November 2008, after the government announced sweeping tax cuts as part of a mini-budget from the newly appointed Truss government. The market’s reaction also sent the sterling crashing to an all-time low of US$1.03, as investors worried about the repercussions of British finance minister Kwasi Kwarteng’s economic proposals. While Kwarteng said his £45 billion of tax cuts would support the economy, the IMF noted the strategy is likely to increase inequality and rating agency Moody’s warned that unfunded tax cuts were credit negative.

This saw the Bank of England imminently announcing plans to carry out temporary purchases of long-dated UK government bonds from 28 September until 14 October to restore orderly market conditions.

European Global Energy prices

News of gas storage and lesser household demand saw Dutch gas futures falling below €160 per MWh, the lowest in 2-1/2 months, albeit 6 times the cost 12 months ago. It has been reported that gas storage sites in Germany were 93.1% full as of end September, above the EU average of 90.1%. These actions occurring as a direct result of the Ukraine war that has spiked primarily gas and oil prices throughout Europe.

However, whilst the mood over energy supply shows improvement, the European Union is still staring into a potentially catastrophic energy crisis as winter approaches, with policymakers becoming increasingly frantic about what to do next, what message to give and what relief to offer for households and companies under extreme financial stress.

European Union leaders are divided over capping gas prices, with Germany, Denmark and the Netherlands opposing any cap, on concerns that it would make it difficult to buy the gas they need. The EU and Norway agreed to jointly develop tools to stabilise energy markets and limit the impact of market manipulation and of price volatility.

Gas supply from Russia now represents around 9% for Europe, compared to 40% before the war in Ukraine, with Norway now being Europe’s biggest supplier.

Developments in financial markets

Australian Equities

Slightly improved sentiment which resulted in Australian equities markets rallying through July and August has now dissipated. The ASX300 Accumulation Index shed 6.29% over September to bring the 1-yr rolling return down to -8%. With the gains over the previous two months and the recent drop, it is safe to say the debate as to whether the upswing was or wasn’t a bear market rally is now decided.

Small and large caps both dropped, though large caps fared marginally better. The S&P/ASX100 closed the month down 6.89%, the S&P/ASX MidCap 50 dropped 8.12%, and the S&P/ASX Small Ords sank 11.20%. The Small Cap index has been brought to its knees on a 1-yr basis showing a -22.56% return since September 2021.

All Australian sectors closed September in the red. The worst was felt across Utilities, posting -12.24%, though still up 13.44% for the year. Second was Real Estate with a 12.99% drop, culminating in a -19.44% 1-yr performance. Industrials came in third with an 8.97% drop (-6.76% 1-yr), followed by Energy with -8.13% – though still the best performer on a 1-yr basis posting a +21.22% return. Info Tech and Consumer Discretionary closed September at -7.4% and -7.37% respectively, producing agonising -37.35% and -23.32 1-yr rolling returns.

International Equities

Global indices followed the same risk-off profile and finished September well in red territory. The MSCI World Ex Australia (unhedged) shed 3.23%, giving a -9.79% 1-yr return.

Over in the USA, the S&P500, NASDAQ, and Down Jones lost 9.21%, 10.44%, and 8.76% respectively over the month. These results drag the 1-yr rolling returns further down to -15.47%, -26.25%, and -13.40%.

European markets were no different. The STOXX Europe 600 Total Return index fell 6.57%, bringing the rolling 1-yr to -17.72%. The French CAC 40 fell 5.92%, the German DAX 5.61, and the UK FTSE100 followed with a 5.36% drop. Their 1-yr rolling returns fell to -11.62%, -20.62%, and -2.72% respectively.

Asian markets could not escape the turmoil, with the Korean KOSPI ending September down 12.81% and the Japanese Nikkei 225 down 6.59%. The KOSPI’s 1-yr rolling return is now -29.78%. The Chinese Shanghai Composite and Hong Kong’s Hang Seng continued to fall, closing the month down 5.55% and 13.69% respectively, and are both still under strain for the year with their 1-yr rolling returns at -15.24% and -29.92%.

Fixed Interest

Central banks’ war on inflation continued to take their toll on Fixed Interest markets throughout September. Only five central banks are in an easing cycle globally, with the rest all tightening monetary policy.

Domestically, the Bloomberg AusBond Composite (0+Y) ended the month down 1.36%, dragging its 1-yr return further negative at -11.36%.

International markets saw the Barclays Global Aggregate TR Hedged index slipped 3.50% over the month, translating into a -12.81% 1-yr rolling return.

Foreign Exchange

The USD maintained its ‘safe-haven’ status over September, bringing its 1-yr performance against major currencies up to eye-catching levels. The Australian dollar shed a further 6.46% against the USD to end the month at 0.6400, down 11.44% on a 1-yr basis.

The Japanese Yen, Pound Sterling, and Euro all played to the same tune against the USD. The USD/JPY pair ended the month up 4.16%, closing at 144.74 (a monumental +30.06 1-yr rolling). The GBP/USD closed 3.89% down at 1.117 (-17.10% 1-yr rolling), and the Euro finished September down 2.51% against the Greenback at 0.9802, below parity (-15.35% 1-yr rolling).

Commodities

To the relief of many consumers, commodity markets were mostly down over September. The Bloomberg Commodity Index, which tracks a broadly diversified set of energy, grains, metals, softs, and livestock futures, closed the month deep in red territory at -8.35% (though still posts a comfortable +10.65% 1-yr return). The energy sector’s bull run continued to stumble, with Brent Crude down another 8.84%, closing at USD$87.96. Gold shed 2.95% over September to finish at US$1660.61/oz, and Iron Ore rose a modest 0.24% to close at USD$95.48 per tonne.

Market Charts

Market Data

Source: BTIS – Westpac Financial Services Limited – September 2022

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