BT Index Defensive Fund (WFS0588AU) Report & Performance

Consumer sentiment started 2023 on a positive note, rising to 84.3 in January, an increase of 5.0% in the month. Sentiment is at its highest level since September, though still deeply pessimistic as the mood among consumers is downbeat among higher interest rates and elevated cost-ofliving pressures. Encouragingly, consumers are slowly becoming less pessimistic about the future.

The weak consumer sentiment is expected to flow through to a slowdown in household spending. However, this is taking time as spending has been supported by robust household savings, an unleashing of pent-up demand, and a tight labour market. These factors are expected to fade as we move through 2023. The December quarter’s headline inflation read came in at 1.9%, to be 7.8% in annual terms.

This annual rate is the highest in nearly 33 years, though was under the RBA’s forecast of 8%. Goods inflation is showing some signs of easing, though this may be happening too slowly for the RBA’s liking. More troubling for the RBA is that price pressures have broadened and inflation in the services industry has accelerated to 5.5% p.a. – its highest rate since 2008. This was driven by the hospitality industry with consumers seemingly blasé by the 10.9% quarterly increase in the price of holiday travel and accommodation.

2022 was a year unlike any other. It was initially predicted to be one of repair and recovery following the global pandemic, though it was found to be rather rife with political uncertainty, market volatility, interest rates, supply chain disruptions, and of course, resultant high inflation. As we move into 2023, indicators are that inflation may have peaked, with language from central banks now debating whether they will pivot or pause their rate hike strategies.

Australia
There is growing evidence the economy is starting to slow as the weight of this year’s rate hikes take a toll. Data released in December indicated retail spending fell in October for the first time this year as consumers remain deeply pessimistic about the economic outlook. Moreover, November’s inflation numbers unexpectedly showed an easing in price pressures. This data may be an early sign that inflation has started to roll over and that it will peak in the current quarter, as expected by policymakers. However, one month’s number is not enough to constitute a trend. Also, the monthly inflation measure is not as important as the quarterly inflation measure that the RBA focusses on, although it has been providing reliable guidance. Encouragingly, China has also further relaxed COVID-19 restrictions, supporting a further improvement in globalsupply chain disruptions. Furthermore, the unemployment rate fell to its lowest in nearly 50 years and the wage price index reveals an acceleration is underway in wages growth.

Markets rallied over October against a strong headwind of a tighter US rate rise trajectory, mixed economic data across the globe, a new UK prime minister and still no let-up of the Chinese leadership’s zero-COVID policy. Concerns remain over energy supply as Europe moves towards the winter months and whilst on the topic of Europe, the impacts of their central banks’ October rate rise to combat record levels of inflation being reported in that region. As we look ahead, global recession remains a front-of-mind topic of discussion.

Australia
Producer price inflation continued to increase through the September quarter. The Producer Prices Index (PPI), which measures the average change over time in the selling prices received by domestic producers for their output, accelerated 1.9% over the quarter. This brought the index’s rise to 5.6% over the year to September. This suggests that inflationary pressures are still building in the pipeline. Headline inflation continued to accelerate rapidly in the September quarter, surging to 7.3% – the highest annual pace in over 32 years.

While global supply-chain disruptions and energy price shocks are major drivers of inflation, pressures continue to spread across a range of spending categories. Strong domestic demand is marking up against constrained supply, leading to further increases in prices. Of all the spending categories and sub-categories measured by the Bureau of Statistics, over 85% grew at an annual pace of more than 2.5% (the mid-point of the RBA’s 2-3% target band). The last time more than 85% of categories and sub-categories grew at an annual pace of over 2.5% was in 1990.

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.

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.

The bullish sentiment in July that saw a strong market recovery was tempered over August as a more hawkish tone from Central Banks pushed most markets into negative territory. While the argument over whether we have hit ‘peak inflation’ continues, we saw US inflation moderate, however the Eurozone’s continues to rise. Political uncertainty continued in the UK, where looking ahead, a fourth Prime Minister in six years was elected. This is in the face of an economy that has now slipped behind India in the World Bank’s latest global GDP rankings.

Australia
Over August, wage pressures across the economy have been growing steadily. Survey measures suggest that total labour costs (including employment growth) are increasing at the fastest rate on record. Reports of oversized wage increases are common, particularly in industries with strong labour demand and labour supply issues. This includes IT, professional services, construction, and parts of the services sector that previously had a heavy reliance on international students and migrants. These wage pressures are expected to flow through into the Wage Price Index (WPI) over time. Growth in the WPI had only returned to around pre-pandemic levels in the March quarter. For the June quarter, we predict that wages grew by 0.9%, to be 2.9% higher over the year. If our forecasts prove to be correct, this will result in the strongest quarterly wages growth since mid-2012 and the strongest annual growth since mid-2013.

After a benign June month for the world’s share markets, July saw a bounce back driven by easing fears of central banks’ over-tightening of monetary policy, stronger consensus on peak inflation and a solid Q2 reporting season out of the US, which all helped shape a good month for markets in the face of still evolving geopolitical tensions.

July saw the Westpac Melbourne Institute Index of Consumer Sentiment fall 3.0% to 83.8 from 86.4 in June, marking the seventh consecutive monthly fall. The survey, covering 1200 respondents, was conducted over the four days from July 4th to July 7th. Last month we noted the Index was already around levels that, since the beginning of the survey in 1974, had only been seen during periods of major disruption in the Australian economy, including the COVID pandemic, the Global Financial Crisis, the recession in the early 1990s, the slowdown in the mid–1980s, and the recession of the early 1980s. This fall in July means that the pace of the sentiment deterioration is now also in line with these infamous periods. The Index has now fallen 19.7% since December 2021, a precipitous tumble comparable to the two–month plunge during COVID (–20.8%), the six– monthly declines seen heading into the Global Financial Crisis (–29.7%), the early 1990s recession (–20.5%), the mid–1980s downturn (–23.8%), and early 1980s recession (–18.8%).