BlackRock Advantage Hedged Intl Equity (BGL0109AU) Report & Performance

The MSCI World Ex Australia Index gained 3.16% in unhedged AUD terms and 1.64% in fully hedged to AUD terms in April 2023.

Financial markets were relatively calm over April despite the uncertain macroeconomic outlook. Global equities, as measured by the MSCI World Index, increased by 3.1% over the month in Australian dollar terms as investor sentiment held steady. Developed Markets outperformed their Emerging Market counterparts. Fixed Income markets, as represented by the Bloomberg Barclays Global Aggregate Index (hedged), remained relatively volatile but also closed the month in positive territory up 0.4%.

In the US, the S&P 500 Index increased by 1.6% in April (in local currency terms), with Communication Services and Real Estate sectors among the best performers. Core inflation data for March met expectations at 4.7% while the unemployment rate unexpectedly fell to 3.6%, reflecting ongoing tightness in the labour market. US regional banks have also come under renewed scrutiny after the troubles of First Republic Bank, which sold-off sharply after reporting a significant drop in deposits. The recent banking tumult has resulted in further tightening of credit conditions which is likely to drag on economic activity. Although corporate reporting season for Q1 has seen strong performance in terms of earnings surprises relative to analyst expectations, a year-on-year decline in corporate earnings is expected for a second straight quarter.

European equities, as represented through the Euro Stoxx 50 Index, increased by 1.6% across the period (in local currency terms), with luxury goods producers among the best performers. However, European economic activity remains challenged, with Q1 GDP growing a mere 0.1% from the previous quarter even as the energy shock faded. In April, European Central Bank (ECB) Executive Board Member, Isabel Schnabel, signaled more rate hikes ahead and noted concerns about strong underlying inflation and wages growth. Over the month, the German government also reached a pay deal with labor unions for 2.5 million public sector workers to receive a 5.5% pay rise.

The MSCI World Ex Australia Index gained 9.20% in unhedged AUD terms and 7.14% in fully hedged to AUD terms in Q1 2023.

Major asset classes performed strongly over the first quarter of 2023, despite significant turmoil within the financial sector. Global equities, as measured by the MSCI World Ex Australia Index, increased by 9.2% over Q1 in Australian dollar terms. Developed Markets outperformed their Emerging Market counterparts, with fears of broader contagion across the banking system easing late in March. However, investors remain alert for signs of any further financial cracks and economic damage following the collapse of Silicon Valley Bank and forced acquisition of Credit Suisse by UBS. Fixed Income markets, as represented by the Bloomberg Barclays Global Aggregate Index (hedged) saw meaningful volatility but gained 2.4% over the quarter.

In the US, the S&P 500 Index increased by 7.5% over the quarter and by 3.7% in March (in local currency terms). The Information Technology sector outperformed while Financials recorded losses as US regional banks sold off after the collapse of Silicon Valley Bank. Despite the recent banking stress, the US Federal Reserve (Fed) increased the Fed funds rate by 50 basis points over Q1 but introduced a new liquidity backstop to help banks meet depositor withdrawals. Fed Chair, Jerome Powell, also cautioned that the Fed was not contemplating any rate cuts later this year, contrary to market expectations for a policy pivot following the latest banking tumult. Meanwhile, core inflation rose less than forecast at 4.6% year-on-year in February, while key housing market indicators have also shown signs of slowdown.

European equity markets, as represented through the Euro Stoxx 50 Index, increased by 14.2% in the first quarter and by 2.0% in March (in local currency terms). The takeover of Credit Suisse by UBS took the spotlight, with Swiss regulators swiftly facilitating the acquisition given sustained capital flight by the bank’s depositors. Meanwhile, the European Central Bank’s (ECB) hiked twice by 50 basis points over Q1. Following the March rate decision, ECB President, Christine Lagarde, struck a hawkish tone by re-stating the priority of reining in inflation – having seen core Eurozone inflation reach an all-time high of 5.7% over February.

In the UK, the FTSE 100 Index gained by 3.6% over the quarter but lost 2.5% in March (in local currency terms). The Bank of England pushed up its policy rate to 4.25%, having hiked rates twice over the period. UK inflation remains stubbornly high, with February CPI data increasing unexpectedly to 10.4% on the back of rising food prices and energy bills. Britain experienced widespread worker strikes over Q1, with unions across a range of industries protesting pay and working conditions, amidst a tight UK labour market.

Asian equities recorded positive returns in Q1. China’s CSI 300 Index rose by 4.7% over the quarter but declined by 0.5% in March (in local currency terms), with gains earlier in the quarter underpinned by the country’s economic reopening. In March, the country set its new GDP growth target of “around 5%” for 2023, representing its lowest for more than three decades and below last year’s goal of 5.5%. China’s domestic restart continues apace with February data showing strong activity and credit growth, while official non-manufacturing PMI hit a 12-year high late in the quarter.

The MSCI World Ex Australia Index gained 2.09% in unhedged AUD terms and -1.63% in fully hedged to AUD terms in February 2023.

Following a strong start to the year, financial markets experienced more volatility in February as strong economic data drove a repricing higher in interest rates. Global equities, as measured by the MSCI World Index (hedged), declined by 1.6% over the month, while the unhedged index finished February up 2.1% as currency moves offset the decline in international share prices. Fixed Income markets, as represented by the Bloomberg Barclays Global Aggregate Index (hedged), recorded losses and closed the month down 1.8%.

In the US, the S&P 500 Index fell by 2.4% in February (in local currency terms), with Energy and Utilities sectors among the worst performers. Strong inflation prints again took centre stage over the month, as both headline and core inflation for January came in above expectations. In addition, the unemployment rate declined to a multi-decade low of 3.4% while US retail sales climbed to a two-year high. Signs that inflation is proving persistent and inconsistent with hopes for a quick return to the US Federal Reserve’s (Fed) target, along with strongerthan-expected economic data, saw the notion of any potential rate cuts in 2023 fade. The corporate reporting season for Q4 also showed evidence of weaker fundamentals, with less companies beating earnings forecasts and a smaller proportion of firms raising earnings guidance compared to the previous season.

European equities, as represented through the Euro Stoxx 50 Index, increased by 1.9% in February (in local currency terms). European assets have outperformed most major markets in recent months, despite core inflation increasing to 5.3% in January. Business activity continued to improve across the Eurozone with improvements in flash Purchasing Managers’ Index (PMI) readings. Over the month, the European Central Bank (ECB) hiked interest rates by 50 basis points to bring its policy rate to 2.50% and the Bundesbank President, Joachim Nagel, suggested the ECB may need to further tighten policy past its upcoming March meeting. Meanwhile, European corporate earnings disappointed with only four sectors recording positive earnings growth year-on-year.

In the UK, the FTSE 100 Index rose by 1.8% over February (in local currency terms). While UK inflation remains elevated, it dipped for the third month in a row to 10.1% in January which was below economist forecasts. Over the period, Prime Minister, Rishi Sunak struck a landmark deal with the European Union on post-Brexit trade rules for Northern Ireland to help resolve trade barriers and ease diplomatic tensions. Earlier in the month, the Bank of England (BOE) hiked rates by 50 basis points as expected but pushed back against future rate hikes.

The MSCI World Ex Australia Index gained 3.95% in unhedged AUD terms and 7.17% in fully hedged to AUD terms in Q4 2022.

Major asset classes rose over the final quarter of 2022, although growing recession fears saw sentiment wane in December. Global equities, as measured by the MSCI World Index, increased by 3.9% over Q4 in Australian dollar terms, supported by the unwinding of China’s zero-COVID policy and softer inflation data. Emerging Markets outperformed their Developed Market counterparts. For the full year, global equities remain in negative territory at -12.5%. Fixed Income markets, as represented by the Bloomberg Barclays Global Aggregate Index (hedged) gained 0.6% over the quarter after suffering sharp losses earlier in the year.

In the US, the S&P 500 Index increased by 7.6% over the quarter but fell by 5.8% in December (in local currency terms), The initial rally in equities was underpinned by resilient corporate earnings and moderating inflation data, the latter of which bolstered investor hopes for a less aggressive monetary stance. The US Federal Reserve (Fed) slowed the pace of rate hikes by increasing the Fed funds rate by only 50bps in December (compared to 75bps in November). However, the Fed published a new set of interest rate projections which predicted the policy rate will rise to 5.1% by the end of 2023 – another significant revision upwards. A decline in goods prices saw two consecutive months of weaker CPI data, however services inflation remains stubbornly high. The US labour market remains tight, with average US hourly earnings rising by double the consensus forecast in November to reach a 5.1% annual rate.

European equity markets, as represented through the Euro Stoxx 50 Index, increased by 14.6% in the fourth quarter but declined by 4.3% in December (in local currency terms). Early signs that the European energy crisis may be abating and a possible peak in inflation helped stocks rally during the quarter. While Eurozone consumer prices rose by 10.1% in November, this was lower than markets had expected, given a noticeable drop in energy prices, and down from a record high in October. However, equities lost momentum after the European Central Bank’s (ECB) policy meeting in December, as investors baulked at the hawkish rhetoric by ECB President, Christine Lagarde, who signalled that future rate increases would be higher than expected and painted a bleak economic picture. The ECB also announced that quantitative tightening will begin in March 2023 to shrink the bond holdings on their balance sheet.

The MSCI World Ex Australia Index gained 2.02% in unhedged AUD terms and 5.43% in fully hedged to AUD terms in November 2022.

The recovery in global equity and fixed income markets continued over November. Risk assets gained amid speculation that monetary tightening by global central banks has begun to moderate, while policy developments in China and softer inflation data across key economies supported investor sentiment. Global equities, as measured by the MSCI World
Index, increased by 2.0% over the month in Australian dollar terms, with Emerging Markets outperforming their Developed Market counterparts. Fixed Income markets also saw positive performance, with global bonds closing the month up 2.4% and Australian bonds rising by 1.5%.

In the US, the S&P 500 Index increased by 5.6% in November (in local currency terms), with Materials and Industrials sectors outperforming. US equities rallied when inflation data came in below consensus forecasts, with inflation rising 7.7% in October on an annual basis, compared to the 7.9% print predicted. Expectations that the US Federal Reserve (Fed) will moderate future rate increases on the back of softening inflation also helped markets trend higher.

However, various Fed speakers continued to emphasise that policy tightening still has further to go and the overall level of interest rates is more important than the pace of hikes. Meanwhile, the US midterm elections saw Republicans take control of the House of
Representatives, while the US unemployment rate also rose to 3.7% with the labour market seeing early signs of cooling.

European equity markets, as represented through the Euro Stoxx 50 Index, increased by 9.7% in November (in local currency terms), despite lackluster economic data and weak consumer sentiment.
The initial negative market reaction to a missile landing in Poland was quickly unwound when it became apparent this was an unintended accident by Ukraine’s air defense systems. Purchasing Managers’
Index (PMI) data showed that activity in the European services sector shrank in October – an indication of the growing economic damage from central bank tightening. This tradeoff was also acknowledged in previous European Central Bank (ECB) meeting minutes.

The UK equity market gained 7.1% in November (in local currency terms). As expected, the Bank of England (BoE) raised rates by 75bps, representing its biggest single hike since 1989. Investors also digested the UK government’s anticipated budget statement, which cut spending and raised taxes. This stabilizes the British budget on a new lower level of economic activity, however most of the austerity measures will come beyond the next scheduled election in early 2025.
Headline UK inflation hit a new four-decade high and pushed above 11% per annum on the back of higher energy and food prices.

Asian equities were also positive over the month. China’s CSI 300
Index rose by 9.8% in November (in local currency terms) after falling sharply in previous months. Market sentiment was buoyed by the incremental relaxation of China’s zero-COVID policy. The easing of pandemic controls came amidst widespread anti-lockdown protests across multiple Chinese cities following a recent flare up in COVID-19 cases and accompanying social restrictions. These demonstrations mark one of the largest acts of civil unrest in over a decade and led to a reassessment of pandemic controls to placate public demands.
Earlier in the month, Chinese authorities rolled out several measures to support the property market and ease the liquidity crunch faced by developers.

The MSCI World Ex Australia Index gained 7.81% in unhedged AUD terms and 7.22% in fully hedged to AUD terms in October 2022.

October saw a reprieve for risk assets, with the European energy crisis showing signs of easing and investors speculating there could soon be a potential dovish pivot by central banks. Global equities rallied over the month and the MSCI World Index rose by +7.8% in Australian dollar terms, with Developed Markets outperforming their Emerging Market counterparts. Fixed Income markets saw varied performance, with global bonds closing the month down -0.4% while Australian bonds posted positive returns of +0.9%. Riskier parts of the fixed income market also recorded positive performance given the improvement in risk appetite and tightening of credit spreads.

In the US, the S&P 500 Index increased by +8.1% in October (in local currency terms). US equities were boosted by a resilient corporate earnings season for Q3, with more than two-thirds of companies that have reported results delivering a positive earnings surprise. That said, the magnitude of positive earnings surprise is notably below the 5-year and 10-year average figure – signalling slowing demand across the economy. Energy and Industrials sectors outperformed over the period, while several large-cap tech names, including Meta and Amazon, disappointed. US GDP growth was stronger than expected and bounced back in Q3 to 2.6% annualized, driven largely by higher energy exports. Core PCE, the US Federal Reserve’s (Fed) preferred inflation measure, also accelerated slightly to 5.1% on annual basis over the month. Core inflation remains stubbornly high given strong wages growth and is not far from the 40-year high reached earlier this year.

European equity markets, as represented through the Euro Stoxx 50 Index, increased by +9.1% in October (in local currency terms). The European Central Bank (ECB) announced another 75bps rate hike in October, however ECB President, Christine Lagarde, took a dovish tone by signaling a slower pace of rate hikes ahead. European energy concerns also diminished over the period, with natural gas prices falling given Europe’s success in building up supply ahead of winter. Country inflation data across Germany, France and Italy, which was released late in the month, beat analyst estimates and remains at elevated levels.