OnePath Wholesale Balanced Trust (AJF0802AU) Report & Performance

The strong start to 2023 for equities came to an end in February, with most markets other than Europe weaker in their own currencies as company results pointed to a slowdown in earnings momentum. Stronger employment numbers in the US resulted in expectations for the timing of interest rate cuts being pushed further out, and bond yields resumed their upward trajectory.

Domestically, an additional 25bp rate hike from the RBA put further pressure on the consumer sector and pushed the S&P/ASX300 index (including dividends) down 2.6%. Offshore market returns were helped by a sharp 4.6% fall in the Australian dollar, which meant the MSCI World (AUD) and the US S&P 500 index (AUD) both gained 1.7%, despite falling in local currencies. European and UK shares continued to rebound strongly, with the UK’s FTSE 100 index reaching an all-time high last month and European shares attracting inflows given their cheaper relative valuations. Volatility in Asian markets persisted with Hong Kong notably weaker, dragging down emerging markets indices. Back in Australia, performance was largely a reaction to H1 2023 earnings results with a near record level of earnings misses, but also an elevated number of earnings beats, this bar-bell resulting in relatively few inline results. At a sector level, utilities (+2.3%), technology (+1.9%) and industrials (+1.1%) all outperformed while materials (-7%), financials (- 3.4%) and consumer discretionary (-1.8%) lagged the most.

Banks were softer following their results and despite their numbers coming in largely as expected, with the market becoming concerned over peaking net interest margins. Higher cost pressure was a thematic across the large miners, with their ability to sustain high dividends at risk. Adding further pressure to resources was weakness across the board in commodity prices. Oil prices fell 2% to USD83/bbl, while iron ore also fell to USD117/t after rallying more than 30% the prior three months. Lithium spot prices weakened on signs of rising battery inventory and EV price cutting in China, while copper also lost 2.8%. US 10 year bond yields jumped 42 basis points to 3.92% on stronger economic data, particularly the solid US jobs print. Australian 10 year yields rose 30 basis points to 3.85% as the RBA lift rates a further 25 basis points, a ninth consecutive rise.

Despite a pull-back in markets during December, the final quarter of 2022 was a positive one for equities as early signs of peaking inflation led to expectations that the pace of rate hikes may have also peaked. The surge in bond yields throughout 2022 also stabilised, providing support to equity markets. Australia’s S&P/ASX 300 index (including dividends) gained 9.1% over the quarter, outperforming global developed markets (MSCI World +3.2%) including the US (S&P 500 +1%). Europe (Stoxx 600 +13%) had a strong finish, rebounding as the risk of a potential energy crisis heading into Winter was mitigated by a warm winter and reasonable gas storage levels.

Although 2022 proved a very tough year in emerging markets, as China’s prolonged Covid lockdowns combined with weakness in the property sector weighed on Chinese and Hong Kong listed stocks, there was a glimmer of hope towards the end of the year as government officials announced some easing measures. The China re-opening looks set to be one of the more dominant themes in 2023, with the market already in ‘look-through’ mode as iron ore rose sharply in Q4 2022. This is of course in contrast to the rest of the world where the effect of multiple rate hikes and inverted yields curves could signal forthcoming recessions.

Although the September quarter produced positive returns in Australian dollars for many markets, including Australia and the US, the underlying sentiment remained bearish as Central Banks globally continued to raise interest rates to address inflation printing at persistently high levels. Equity market returns in local currencies were much less flattering as the US dollar continued to strengthen against most other major currencies. Australian shares gained 0.5% including dividends over the quarter, although a 6.3% fall in the month of September dampened the mood as commodity prices fell and global recession fears increased. In local currency, US and European stocks both lost 5% while China and Honk Kong both fell more than 20% as Covid lockdowns weighed on economic growth, and further exacerbated with a weakening Chinese Yuan against the USD.

Although the September quarter produced positive returns in Australian dollars for many markets, including Australia and the US, the underlying sentiment remained bearish as Central Banks globally continued to raise interest rates to address inflation printing at persistently high levels. Equity market returns in local currencies were much less flattering as the US dollar continued to strengthen against most other major currencies. Australian shares gained 0.5% including dividends over the quarter, although a 6.3% fall in the month of September dampened the mood as commodity prices fell and global recession fears increased. In local currency, US and European stocks both lost 5% while China and Honk Kong both fell more than 20% as Covid lockdowns weighed on economic growth, and further exacerbated with a weakening Chinese Yuan against the USD.

Australian equities outperformed most other global markets in August, despite the backdrop of hawkish commentary from the US Federal Reserve dashing hopes that the pace of interest rate rises would slow down soon. A generally better-than-expected corporate earnings season, along with a large amount of dividends hitting investors accounts, led the S&P/ASX300 index (incl dividends) 1.2% higher last month. European shares fell 5.3% as energy supply issues continued to weigh on sentiment, while US shares dropped 4.2% as bond yields resumed their upward trend after falling the previous month.

Australia’s greater composition of energy and mining companies provided a buffer of performance relative to most other markets, with investors benefitting from exposure to rising commodity prices in addition to receiving relatively high dividend yields distributed from mining and financial stocks. August saw most companies report H2 2022 earnings which were generally better than expected, and with investor positioning bearish into the results, this led a rotation from defensives back into domestic cyclicals. The median company beat consensus by 0.7% on H2 net profits, although cuts to FY23 earnings estimates gathered pace with Materials seeing the most aggressive cuts, while Building Materials were revised lower on further input cost pressures. Conversely, insurance stocks received large upgrades with rising rates generally supportive for the sector. US bond yields, after a retreat in July, continued their march higher as US Fed Chairman Jerome Powell delivered a short address at Jackson Hole, putting to bed any speculation that rate hikes are close to reaching their goal of lowering inflation. US 10 year yields rose 54 basis points to 3.19% while Australian 10 year yields also rose by the same margin to close at 3.60%. US 2 year yields rose 61 basis points to 3.49%, inverting the 2yr10yr part of the curve.

Concern about energy continued to weigh on European markets as it heads into Winter, and the Euro fell below parity with the $US, having depreciated by 12% this year. The Nordstream gas pipeline, which runs some 1,200 km under the Baltic Sea between Russia and Germany and provides almost half of Europe’s total gas supply, was closed by Russia for maintenance in August, adding further to anxiety there. With European gas prices having more than quadrupled so far this year, many industries have been forced to shift production offshore. Energy prices undoubtedly remain the biggest cause of an increasingly likely recession in Europe, as affordability pressures hurting both households and industry.

After 10 years of flat or falling interest rates in Australia, rising inflation finally gave way to rate hikes domestically, leading equities to their biggest quarterly loss since the Pandemic. The S&P/ASX 300 index, including dividends, fell 12.2% over the June quarter underperforming global markets. After a relatively strong start to the year, June was a month where crowded sectors like materials and financials bore the brunt of the sell-off as commodity prices fell and rate hikes fuelled concern over the housing market and consumer demand more broadly. With the Australian Dollar falling 8% to USD0.69, this currency benefit helped offshore markets in AUD terms with Europe (-8%), the US (-9%) and Emerging Markets (-5%) all outperforming Australian shares. One of the largest swing factors in markets currently is the outlook for China, trying to navigate out of Covid lockdowns while at the same time addressing a weak housing market. Its desire to stimulate and increase money supply has put it out of sync with most other global markets entering a tightening cycle. Appearing somewhat more immune to the rate hiking seen in most other regions, there was a rotation back into China and Hong Kong. The Shanghai Composite index was up 11% in June in $A terms, although it is still -6% year to date.

On a sector level, only Energy and Utilities posted small gains over the quarter, with the defensive Healthcare and Consumer Staples also outperforming. Technology and Property stocks were the weakest sectors, with rising rates shining a spotlight on valuations. Banks were under pressure given the looming stresses in the housing market and construction industry, offsetting any benefit to net interest margins from rising rates. Weakness in Materials (-16.7%) was a large driver of broader market declines as commodities fell, finally cracking on recession fears and the outlook for weaker demand under this scenario.