Pitcher Partners Investment Services (Melbourne) | The information in this article is current as at 07 July 2023
Slowdown, what slowdown?
In taking an initial glance at the performance for equity markets for the 2023 financial year, one could easily interpret that investors have seemingly shrugged off any recessionary/slowing growth concerns around the world.
Over the last 12 months, many central banks have lifted their cash rates anywhere between 150-400+ bps to address surging inflation pressures. While it now appears that at least headline inflation numbers are beginning to decline (we note the UK has recently witnessed a bout of reinflation), the blunt transmission effect of higher interest rates and tighter lending standards usually takes some time to filter into the real economy. And while we believe this process has commenced, we currently feel there is more economic ‘pain’ to come, which unfortunately points to a less rosy outlook for investment markets heading into 2024. We look forward to sharing the latest economic and market outlook from our Investment Strategy Committee with you later this month.
In turning towards the performance of financial markets, Australian (+14.8%) and global equities (+22.6% unhedged) produced the most striking gains out of all our asset classes for the financial year. This clearly contrasted with the performance of fixed income markets (Australia +1.2%, Global bonds -1.2%), which told a different story. Bond markets were continually repriced over the course of the year, as hawkish central banks regularly reset market expectations about where interest rates were going to peak, with major inversions of the 2/10yr yield curves of both the U.S and Australia.
There was a clear distinction between the performance of local versus global REITS. A-REITS rose 8% for the financial year as investors hunted higher yielding and oversold businesses, while G-REITS fell 6% as concerns over slowing economic growth, weakness in the US commercial property sector and looming broad valuation resets/pressures across private markets weighed on total returns.
The Alternatives asset class provided many highlights for investors over the year, with private debt, private equity and unlisted infrastructure delivering attractive absolute returns. Liquid hedge funds saw more of a mixed performance with varying outcomes observed across macro, equity long short, commodity and trend-based strategies.
Our proxy for cash, the Bloomberg Bank Bill Index, rose 2.9% in nominal terms while the Australian dollar closed 30 June at US$0.6664, a decline of 3.5% for the 12 months.
Q2 2023 – Quarter in review
The Australian economy has begun to show the effects of higher interest rates and various cost of living pressures, with the economy growing just 0.2% for the first quarter. Consumer spending is expected to slow even further in Q2, leading to a consensus expectation for a flat GDP outcome in Q2.
Offshore, Eurozone entered a technical recession with its second consecutive quarterly GDP decline announced in Q1. The US economy continues to slow but economic data in recent months proved to be more resilient than market expectations. China’s surge in activity post the re-opening of its economy lost some steam, resulting in some modest announcements around policy stimulus by quarter end.
Inflation pressures offshore continue to recede from the extreme headline numbers reached late in 2022, but services-based inflation, which is more prevalent in developed market economies, continues to be sticky against a backdrop of still very tight labour markets across many countries.
After pausing in April, the RBA lifted the cash rate to 4.1% at its June meeting, maintaining a hawkish bias that has pushed market expectations for peak interest rates to reach 4.6% by the end of Q3. The Federal Reserve hit the pause button in June after 10 consecutive months of increasing interest rates but flagged that further rate hikes may be required before the end of the calendar year.
Global equities in particular rallied strongly off this backdrop, with the gains concentrated in a handful of areas including companies linked to the hype around artificial intelligence, such as US-listed chip maker Nvidia, which passed through the A$1tn market capitalisation barrier, following a >400% gain in its share price over the year. Japanese equities also performed strongly on account of improved relative valuations and earnings growth.
Australian equities rose 1%, led higher by cyclicals and growth stocks which offset weakness across the consumer and resources sectors. Large caps continued their run of outperformance over small caps.
It was a very weak quarter for Australian bonds, with our benchmark index declining 3% as the RBA caught the market off guard with its hawkishness, compounded by a partially shifting narrative around productivity growth vs wage pressures. Floating rate credit outperformed on a relative basis. Global bonds fell 0.3% for the period, while the $A fell modestly against the $US.
Our Newsletter Articles
This quarter we share our thoughts with respect to one of the hottest topics right now, artificial intelligence. We also talk about the immense growth opportunity that lies in front of Macquarie with its green investment bank and we continue our series of notes that aim to demystify various alternative strategies, with an introduction to royalty investing.
We hope you enjoy the content provided in this edition and look forward to chatting through these issues and more with you in detail over the coming months.