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The storm of inflation Kardinia Capital October 2022
Speakers: Stuart Fechner, Head of Research and Asset Consultant Relationships |
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Funds operated by this manager: Bennelong Kardinia Absolute Return Fund |
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The content contained in this audio represents the opinions of the speakers. The speakers may hold either long or short positions in securities of various companies discussed in the audio. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely as an avenue for the speakers to express their personal views on investing and for the entertainment of the listener. |
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Hedge Clippings | Friday, 28 October 2022
When you're in a hole, stop digging! There's an old investment adage that goes along the lines of "let your winners run, and cut your losses early". However most fund managers have a stated mandate or strategy, so it's not quite as easy as that, particularly when there's an underlying shift in economic conditions, market direction, or style. While an individual investor - assuming they have the knowledge or good advice - can adjust more easily, such as by changing sector and stock selections, buying option protection, or moving to cash, (although in truth, many don't - until it's too late) that's easier said than done - without the benefit of hindsight. For many fund managers, while they may have the knowledge or foresight, they are also constrained by the mandate included in the fund's offer documents. They can mitigate risk to a certain degree by retaining or buying defensive stocks at the expense of those with economic or sector headwinds, but unless they're long/short, have the ability to de-risk through options and derivatives, or have a wider mandate, there's less flexibility available. This creates issues for investors in those funds as well. Almost all offer documents will indicate that an investment in the fund should be considered over 5 or 7 years to ride out both performance variations and changes to the underlying economic and market conditions. So do you stick with the funds you have, or adjust allocations to meet the market? The answer to the above dilemma will vary according to individual circumstances, including the level of diversification in an existing portfolio, a view on the ever changing economic outlook, and each individual investor's risk profile. What makes it difficult at the present time is the following broad statistics: Over 12 months to the end of September:
If we wind the clock back 12 months, how times have changed:
So in the space of 12 months, the best performing sector/peer group has fallen from the top to the bottom performer. Talk about rooster to feather duster! Statistics of course can prove or disprove anything, depending on what you want other people to believe. Within each of the Peer Groups the individual fund's performances also vary dramatically. What however is the lesson? Obviously individual fund selection matters, as can asset allocation, and in the above instance, peer group selection. But given those variations and fluctuations, plus a changing global economy, the one over-riding message is diversification. With appropriate diversification, and an understanding of one's risk tolerance, a portfolio should be able to deliver through the cycle. Fund Monitors' Peer Group Comparison and Analysis is available here. New Funds on FundMonitors.com Investment Perspectives: A closer look at US housing | Quay Global Investors 10k Words - October Edition | Equitable Investors China's deflating property market threatens wider economic trouble | Magellan Asset Management |
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September 2022 Performance News Delft Partners Global High Conviction Strategy Digital Asset Fund (Digital Opportunities Class) Skerryvore Global Emerging Markets All-Cap Equity Fund |
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| Manager Comments | The PURE Resources Fund has a track record of 1 year and 5 months and therefore comparison over all market conditions and against its peers is limited. However, the fund has outperformed the ASX 200 Total Return Index since inception in May 2021, providing investors with an annualised return of 10.24% compared with the index's return of -1.23% over the same period. Over the past 12 months, the fund's largest drawdown was -3.9% vs the index's -11.9%, and since inception in May 2021 the fund's largest drawdown was -3.9% vs the index's maximum drawdown over the same period of -11.9%. The fund's maximum drawdown began in September 2022 and has lasted , reaching its lowest point during September 2022. During this period, the index's maximum drawdown was -11.56%. The Manager has delivered these returns with 6.79% less volatility than the index, contributing to a Sharpe ratio for performance over the past 12 months of 1.31 and for performance since inception of 1.32. The fund has provided positive monthly returns 78% of the time in rising markets and 63% of the time during periods of market decline, contributing to an up-capture ratio since inception of 39% and a down-capture ratio of -11%. |
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Four key reasons for adding risk into Q4 Yarra Capital Management October 2022 It's probably one of the great understatements to describe markets in the third quarter as "challenging", with July's initial bounce in global equities giving way to an ugly 9.3% decline in September. And while it's a similar story in fixed income, it is noteworthy that Australian fixed income has performed materially better (-1.4% in Sept qtr) than global fixed income (-5.1%). So the question remains: do we still think the final quarter will bring a more genuine rebound for risk assets? And should we begin to tilt our expectations for a bigger recovery in global markets and in turn, a higher Australian dollar? In our latest update, Tim Toohey, Yarra Capital Management's Head of Macro and Strategy, details his four reasons for adding risk to portfolios into Q4. Speaker: Tim Toohey, Yarra Capital Management's Head of Macro and Strategy |
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Funds operated by this manager: Yarra Australian Equities Fund, Yarra Emerging Leaders Fund, Yarra Enhanced Income Fund, Yarra Income Plus Fund |
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| Fund Overview | The Fund offers a choice of three investment classes, each of which adopts a different investment strategy: - The Digital Opportunities Class identifies and trades low risk arbitrage opportunities between different exchanges and a number of digital assets; - The Digital Index Class tracks the performance of a basket of digital assets; - The Bitcoin Index Class tracks the performance of Bitcoin. Digital Opportunities Class: This class appeals to investors seeking an active exposure to the digital asset markets with no directional bias. The Digital Opportunities Class employs a high frequency inspired Market Neutral strategy trading 24/7 which uses a systematic approach designed to offer uncorrelated returns to the underlying highly volatile cryptocurrency markets. The strategy systematically exploits low-risk arbitrage opportunities across the most liquid and active digital asset markets on the most respected exchanges. When appropriate the Fund may obtain leverage, including through borrowing cash, securities and other instruments, and entering into derivative transactions and repurchase agreements. DAFM has a currency hedging policy in place for the Units in the Fund. Units in the Fund will be hedged against exposure to assets denominated in US dollars through a trading account with spot, forwards and options as directed by DAFM. |
| Manager Comments | The Digital Asset Fund (Digital Opportunities Class) has a track record of 1 year and 5 months and therefore comparison over all market conditions and against its peers is limited. However, the fund has outperformed the S&P Cryptocurrency Broad Digital Market Index since inception in May 2021, providing investors with an annualised return of 38.53% compared with the index's return of -47.24% over the same period. Over the past 12 months, the fund hasn't had any negative monthly returns and therefore hasn't experienced a drawdown. Over the same period, the index's largest drawdown was -71.98%. Since inception in May 2021, the fund's largest drawdown was 0% vs the index's maximum drawdown over the same period of -71.98%. The Manager has delivered these returns with 51.68% less volatility than the index, contributing to a Sharpe ratio for performance over the past 12 months of 2.53 and for performance since inception of 1.55. The fund has provided positive monthly returns 100% of the time in rising markets and 100% of the time during periods of market decline, contributing to an up-capture ratio since inception of 6% and a down-capture ratio of -48%. |
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| Fund Overview | For fund investors, The Income and Growth Fund offers a unique risk/return profile. This form of investing includes a high yield, yet retains equity exposure to successful growth stories. Furthermore, the Fund's superior position in the investee Company's capital structure insulates investors from capital loss. PURE targets a return of 15% per annum through a mixture of Income (8-9%) and capital growth. While most investments involve ASX listed companies, the fund mandate retains modest flexibility to capitalise on attractive pre-IPO opportunities. |
| Manager Comments | The PURE Income and Growth Fund has a track record of 3 years and 10 months and therefore comparison over all market conditions and against its peers is limited. However, the fund has outperformed the ASX 200 Total Return Index since inception in December 2018, providing investors with an annualised return of 14.51% compared with the index's return of 7.61% over the same period. On a calendar year basis, the fund has only experienced a negative annual return once in the 3 years and 10 months since its inception. Over the past 12 months, the fund's largest drawdown was -4.97% vs the index's -11.9%, and since inception in December 2018 the fund's largest drawdown was -5.86% vs the index's maximum drawdown over the same period of -26.75%. The fund's maximum drawdown began in February 2020 and lasted 3 months, reaching its lowest point during March 2020. The fund had completely recovered its losses by May 2020. The Manager has delivered these returns with 4.46% less volatility than the index, contributing to a Sharpe ratio which has fallen below 1 two times over the past three years and which currently sits at 1.09 since inception. The fund has provided positive monthly returns 71% of the time in rising markets and 40% of the time during periods of market decline, contributing to an up-capture ratio since inception of 45% and a down-capture ratio of 5%. |
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China's deflating property market threatens wider economic trouble Magellan Asset Management October 2022 |
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The Reserve Bank of New Zealand a year ago became the first advanced central bank to raise interest rates to cool its economy to tackle inflation. So far, the RBNZ has lifted its key rate seven times. The Bank of England, starting last December, has boosted its benchmark rate seven times too. The Reserve Bank of Australia has hiked the cash rate six times in six months; the Bank of Canada five times in seven months. The Federal Reserve has hoisted interest rates five times over six months. The European Central Bank has conducted two rate increases, one by a record amount. In the emerging world, Banco Central do Brazil has raised its Selic rate by 11.75 percentage points in 12 steps. The tally for El Banco Central de la República Argentina is eight increases that tally to 29.5 percentage points. The Reserve Bank of India has boosted its policy repo rate three times this year. What's the People's Bank of China done? It has loosened monetary policy again and again since late 2021. In December last year, the PBOC ordered the cut of the one-year loan prime rate, one of two de facto benchmark lending rates. [1] In January, the PBOC forced cuts in the one-year and five-year loan prime rates, where the five-year rate is the other de facto key rate.[2] In April, the PBOC reduced the amount banks must hold as reserves so they had more to lend.[3] In May, the PBOC instructed banks to again cut the five-year loan prime rate.[4] In August, the PBOC orchestrated a spate of rate cuts,[5] instructed banks to keep lending,[6] and organised special loans of up to US$29 billion for property developers.[7] In September, to support a tumbling yuan that trades within a daily PBOC-set band, the central bank cut the bank forex reserve ratio[8] - yet 10 days later the currency still fell below 7 to the US dollar compared with 6.35 at the start of the year. Same month, the PBOC directed state banks to cut deposit rates for the first time since 2015,[9] manoeuvred to support the yuan that still fell to a record low of 7.2 against the greenback the next day,[10] and applied tweaks to encourage lending to first-time home buyers.[11] Over the 10 months, Beijing has repeatedly announced fiscal stimulus.[12] Policymakers in China are pursuing such remedies because China's economy is hobbled in at least 10 ways. Standing out is the troubled property sector, which drives about 20% of GDP and represents about 66% of urban household wealth. The country is riddled with half-built residential buildings, which is deflating a property bubble. The history behind such worries is that policymakers super-stimulated the property market to compensate for lost exports to get through the global financial crisis of 2008-09. Since 2020, to quell overheating, however, officials under a 'three red lines' policy[13] have restricted credit to property companies, which has dented building activity and bankrupted developers (most notably, China Evergrande Group that has an estimated US$300 billion in liabilities).[14] Home prices have slid every month over the year to August.[15] Since Chinese buy off the plan, many people now own homes yet to be built - The Economist estimates that only 60% of homes pre-sold between 2013 and 2020 have been delivered.[16] Many of these dudded pre-buyers are boycotting mortgage payments - hundreds of thousands of borrowers in more than 100 cities, by some counts.[17] The property crisis so imperils the finances of local governments - they rely on land sales for much of their revenue - cities have implemented about 70 policies to support property, to little avail.[18] The property crisis highlights a second weakness. The country's business, government and household debts reached 280% of GDP in 2019 and can't rise endlessly. Central government debt at 73% of output in 2022, while low by international standards, curtails Beijing's ability to bail out the property sector[19] China's debt-fuelled property woes link into a third challenge; the stability of China's banks, especially the country's 4,000 small and mid-sized banks. In April, several small banks in eastern landlocked Henan Province failed. The fact that authorities silenced depositors entitled to compensation shocked China watchers, especially when on July 10 thugs assaulted depositors in front of police when they protested outside the People's Bank branch office in Henan's capital of Zhengzhou.[20] China's largest banks, having lent to property companies and to risky emerging countries as part of the Belt and Road Initiative, are too shaky to absorb tottering smaller banks. The concern is that a rash of small bank failures could trigger a systemic financial crisis. The perils surrounding China's banks are amplified by a fourth problem; covid-19. To enforce a zero-covid policy, Chinese authorities have locked down large cities to control the disease because they can't rely on the inferior China-made vaccines and refuse to import foreign ones. These repeated lockdowns of up to 30% of China's population have stifled economic activity, created youth unemployment of 20%, undermined business and consumer confidence, prevented people from scouting for properties and stirred protests. This lockdown blow to the economy blunts the effect of monetary and fiscal stimulus. China's wobbly banks are no longer protected by the double-digit economic growth of yesteryear, or even the 7.1% annual growth from 2011 to 2020. China's worst-ever heatwave and the linked drought is a fifth economic misfortune, even if a temporary problem.[21] Factories have been forced to cut production because hydro generation has halved.[22] Water levels have dropped enough to impede river trade. Food prices have jumped. Authorities have warned the drought poses a "severe" threat to the coming autumn harvest, when 75% of the country's grain is gathered.[23] China's sixth trial is that the rate increases implemented by about 90 central banks (according to Bloomberg's tally) are reducing demand for Chinese exports.[24] A seventh worry is that the deglobalisation fanned in part by China-US tensions deters the Western investment that drove China's economic ascension. Higher wages in China, as part of the government's spluttering push to switch from an export-and-investment-led economic model to a consumption-driven protype, deters investment too. An eighth handicap is China-US strains are cutting China off from Western technology, especially related to artificial intelligence, microchips and supercomputers. A ninth and durable impediment is China's poor demographics. A record low fertility rate of 7.52 births per 1,000 people mean the country's population of 1.4 billion is ageing and close to shrinking, commonly accepted as drags on economic dynamism.[25] A tenth handicap is President Xi Jinping's nationalistic and statist ideological bent. Xi favours state intervention in the economy. He has diverted resources to the state sector and preferred industrial ventures while curbing the dynamism of the private sector, especially that of the technology industry. Productivity, the lifeblood of rising living standards, is threatened. China's troubles mean its economy is expected to expand only about 3% in coming years, effectively at recession levels - the World Bank in October reduced its China growth forecast for 2022 from 5% to 2.8%. Such a slowdown comes with local and global consequences. Within China, the biggest risk is the public's faith in the Chinese Communist Party could be tested, especially people's confidence in Xi, China's most powerful ruler since Mao Zedong. Disagreement over an economic recovery plan is even stirring opposition to Xi inside the Communist Party, including within the supreme Politburo Standing Committee (cabinet). "For the first time since the 1989 Tiananmen Square protests, China's leader is facing not only internal dissent but also an intense popular backlash and a real risk of social unrest," assesses. Cai Xia, a professor at the Central (Communist) Party School from 1998 to 2012. [26] Any China slump would be felt around the world because China's output comprises about 19.6% of global GDP on a purchasing-power-parity basis. Many of the commodities, currencies and other assets, priced on an assumption that China will endlessly expand, could falter. Countries dependent on China (Australia, Brazil and Germany that just recorded its first trade deficit since 1991, to cite two) might struggle. Stressed emerging countries tied to the Belt and Road Initiative could suffer because China, having spent US$1 trillion on the project, is no position to release them from punishing terms.[27] A Xi-led CCP under pressure at home could double-down on 'wolf warrior' diplomacy and nationalism. Some fret it makes an invasion of Taiwan more likely.[28] China escaped the worst of the global financial crisis but its reaction may have cultivated a local brew of the same toxicity that makes it unlikely China will become the world's biggest economy any time soon, even ever. At the very least, an era of slow Chinese growth is dawning. At worst, a Chinese implosion could be the biggest blow of all for a fragile world economy. To be sure, China's economy is still expanding, the manufacturing sector is in fine shape and the country's state-backed financial system can absorb huge losses. A drop in imports is preserving China's trade surplus. China's spending on research and development now reaches 85% of that spent by the US. So innovation must be coming that will spur productivity.[29] There are no signs the masses are unruly. With its surveillance technology, perhaps no autocratic regime has been better equipped to stifle dissent. Xi is expected to cement a third term. But his power might be weakened in the process, perhaps a beneficial outcome. Rather than fuel aggression, China's economic woes might push Beijing towards a rapprochement with Washington.[30] China's slowdown at least helps the world curb inflation. Beijing's move towards a consumption-driven economy is the right long-term solution, as is prioritising high-tech and renewable sectors. But such solutions will take time. They can't quickly solve that four decades of growth have stirred imbalances that Xi is exacerbating with lockdowns, aggression abroad and an ideology that restrains economic development. Even more PBOC support might be insufficient to avoid the worst. Source: China's economic statistics come from the IMF's World Economic Outlook Database released in April 2022 unless otherwise stated. The database can be found at: imf.org/en/Publications/WEO/weo-database/2022/April. China's non-financial company, government and household debts in 2019 are from the Bank of International Settlements.
Author: Michael Collins, Investment Specialist |
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Funds operated by this manager: Magellan Global Fund (Hedged), Magellan Global Fund (Open Class Units) ASX:MGOC, Magellan High Conviction Fund, Magellan Infrastructure Fund, Magellan Infrastructure Fund (Unhedged), MFG Core Infrastructure Fund
[1] 'Chinese banks cut borrowing costs to counter economic slowdown.' Bloomberg News. 20 December 2021. bloomberg.com/news/articles/2021-12-20/chinese-banks-cut-borrowing-costs-for-first-time-in-20-months [2] 'Chinese banks cut borrowing costs as PBOC signals easing.' Bloomberg News. 20 January 2022. bloomberg.com/news/articles/2022-01-20/chinese-banks-cut-borrowing-costs-again-on-pboc-easing-signals [3] 'China's central bank takes modest easing path despite covid.' Bloomberg News. 15 April 2022. bloomberg.com/news/articles/2022-04-15/china-s-central-bank-cuts-reserve-ratio-for-banks-to-spur-growth [4] 'China banks cut key rate by record to boost ailing economy.' Bloomberg News. 20 May 2022. bloomberg.com/news/articles/2022-05-20/china-cuts-borrowing-costs-by-record-to-boost-loan-demand [5] 'China shocks with rate cut as data shows 'alarming' slowdown.' Bloomberg News. 15 August 2022. bloomberg.com/news/articles/2022-08-15/china-central-bank-unexpectedly-cuts-key-rate-to-boost-growth. [6] 'China seeks to stabilise property crisis as PBOC urges lending.' Bloomberg News. 22 August 2022. bloomberg.com/news/articles/2022-08-22/china-s-banks-trim-lending-rates-to-reverse-slump-in-borrowing [7] 'China plans $29 billion in special loans to troubled developers.' Bloomberg News. 22 August 2022. bloomberg.com/news/articles/2022-08-22/china-plans-29-billion-in-special-loans-to-troubled-developers [8] 'China cuts forex reserve ratio in bid to support tumbling yuan.' Bloomberg News. 5 September 2022. bloomberg.com/news/articles/2022-09-05/china-battles-yuan-losses-by-unleashing-foreign-exchange-onshore [9] 'China's state banks cut deposit rates for the first time since 2015.' Financial Times. 15 September 2022. ft.com/content/e9d7a148-a7af-400b-8ea3-a76c9607b188?emailId=5c0c3eae-12b0-4649-86a0-e0ed2e6a8474&segmentId=60a126e8-df3c-b524-c979-f90bde8a67cd [10] The PBOC ordered that financial institutions selling foreign-exchange forward contracts be subject to a 20% risk-reserve ratio, up from zero. The change makes it costlier to sell yuan to buy dollars in the derivatives markets. See 'China's central bank moves further to bolster the yuan.' The Wall Street Journal. 26 September 2022. wsj.com/articles/chinas-central-bank-moves-further-to-bolster-the-yuan-11664190159. 'China's offshore currency hits record low against dollar.' The Wall Street Journal. wsj.com/articles/chinas-offshore-currency-hits-record-low-against-dollar-11664333671 [11] 'China property shares rally on policy support.' Financial Times. 3 October 2022. ft.com/content/0ffa4fb4-906f-4faa-8906-8a7e07852c92 [12] 'These are China's new measures to bolster economic growth.' Bloomberg News. 25 August 2022. bloomberg.com/news/articles/2022-08-25/these-are-china-s-19-new-measures-to-bolster-economic-growth. See also 'China's stimulus: All the steps taken recently to boost the economy. Bloomberg News. 26 August 2022. bloomberg.com/news/articles/2022-08-26/china-s-stimulus-all-the-steps-taken-recently-to-boost-economy [13] Bloomberg News. QuickTake. 'What China's three red lines mean for property firms.' 9 October 2020. bloomberg.com/news/articles/2020-10-08/what-china-s-three-red-lines-mean-for-property-firms-quicktake [14] Financial Times. 'Evergrande misses deadline for $300bn debt restructuring plan.' 31 July 2022. ft.com/content/01f8a2c7-4ed1-487b-aada-ac5e2b5a9932 [15] Bloomberg. 'China's home price slump reaches a year as crisis drags on.' 16 September 2022. bloomberg.com/news/articles/2022-09-16/china-s-home-prices-fall-for-one-year-straight-as-crisis-deepens#xj4y7vzkg. The statistics are from the National Bureau of Statistics of China but its website is unsafe. [16] 'China's Ponzi-like property market is eroding faith in the state.' The Economist. 12 September 2022. economist.com/finance-and-economics/2022/09/12/chinas-ponzi-like-property-market-is-eroding-faith-in-the-state [17] Daisuke Wakabayashi. 'Homeowners boycott mortgage payments.' The New York Times. 17 August 2022. nytimes.com/2022/08/17/business/china-economy-real-estate-crisis.html [18] Bloomberg News. 'China rolls out property policies across nation to fix slump.' 14 September 2022. bloomberg.com/news/articles/2022-09-14/china-trickles-out-property-policies-across-nation-to-fix-slump. Bloomberg. 'China's home price slump reaches a year as crisis drags on.' 16 September 2022. Op cit. [19] Non-financial company debt stood at about 160% of GDP and household debt at about 60% in 2019. [20] See 'China's debt bomb looks ready to explode.' Nikkei Asia. 17 July 2022. asia.nikkei.com/Opinion/China-s-debt-bomb-looks-ready-to-explode [21] See New Scientist. 'Heatwave in China is the most severe ever recorded in the world.' 23 August 2022. newscientist.com/article/2334921-heatwave-in-china-is-the-most-severe-ever-recorded-in-the-world/ [22] Bloomberg News. 'Power crunch in Sichuan adds to industry's woes in China.' 21 August 2022. bloomberg.com/news/articles/2022-08-21/power-crunch-in-sichuan-adds-to-manufacturers-woes-in-china [23] Ministry of Agriculture and Rural Affairs of the People's Republic of China. 'China urges intensified efforts to secure autumn harvests amid heatwaves.' 23 August 2022. english.moa.gov.cn/news_522/202208/t20220823_300951.html. See also 'China's record drought is drying rivers and feeding its coal habit.' The New York Times. 26 August 2022. nytimes.com/2022/08/26/business/economy/china-drought-economy-climate.html [24] The World Bank in September warned the rate increases could trigger a "devastating" global recession. The World Bank. 'Risk of global recession in 2023 rises amid simultaneous rate hikes.' 15 September 2022. worldbank.org/en/news/press-release/2022/09/15/risk-of-global-recession-in-2023-rises-amid-simultaneous-rate-hikes [25] ChinaDaily, a government-controlled English-language publication. 'Lower living costs to boost birth rate.' 19 January 2022. global.chinadaily.com.cn/a/202201/19/WS61e75124a310cdd39bc81e1b.html [26] Cai Xia, professor at the Central Party School of the Chinese Communist Party from 1998 to 2012. 'The weakness of Xi Jinping.' Foreign Affairs. September/October 2022. foreignaffairs.com/china/xi-jinping-china-weakness-hubris-paranoia-threaten-future [27] See 'China reins in its Belt and Road Program, $1 trillion later.' The Wall Street Journal. 26 September 2022. wsj.com/articles/china-belt-road-debt-11663961638 [28] See 'War jitters. A weak China may be more warlike than a strong one.' A review of the book 'Danger zone: The coming conflict with China' by Hal Brands and Michael Beckley. The Economist. 1 September 2022. economist.com/china/2022/09/01/a-weak-china-may-be-more-warlike-than-a-strong-one [29] OECD. 'Main science and technology indicators.' September 2020. oecd.org/sti/msti.htm [30] See Victoria Herczegh. 'A confrontation China can't afford.' 27 July 2022. https://geopoliticalfutures.com/a-confrontation-china-cant-afford/ Important Information: This material has been delivered to you by Magellan Asset Management Limited ABN 31 120 593 946 AFS Licence No. 304 301 ('Magellan') and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation. This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should read and consider any relevant offer documentation applicable to any investment product or service and consider obtaining professional investment advice tailored to your specific circumstances before making any investment decision. A copy of the relevant PDS relating to a Magellan financial product or service may be obtained by calling +61 2 9235 4888 or by visiting www.magellangroup.com.au. Past performance is not necessarily indicative of future results and no person guarantees the future performance of any strategy, the amount or timing of any return from it, that asset allocations will be met, that it will be able to be implemented and its investment strategy or that its investment objectives will be achieved. This material may contain 'forward-looking statements'. Actual events or results or the actual performance of a Magellan financial product or service may differ materially from those reflected or contemplated in such forward-looking statements. This material may include data, research and other information from third party sources. Magellan makes no guarantee that such information is accurate, complete or timely and does not provide any warranties regarding results obtained from its use. This information is subject to change at any time and no person has any responsibility to update any of the information provided in this material. Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Magellan. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Any trademarks, logos, and service marks contained herein may be the registered and unregistered trademarks of their respective owners. This material and the information contained within it may not be reproduced, or disclosed, in whole or in part, without the prior written consent of Magellan. |
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| Fund Overview | The fund is managed by Altor Credit Partners. The investment committee comprises Harley Dalton and Ben Harrison. |
| Manager Comments | The Altor AltFi Income Fund has a track record of 4 years and 6 months and therefore comparison over all market conditions and against its peers is limited. However, the fund has outperformed the Bloomberg AusBond Composite 0+ Yr Index since inception in April 2018, providing investors with an annualised return of 11.48% compared with the index's return of 0.32% over the same period. On a calendar year basis, the fund hasn't experienced any negative annual returns in the 4 years and 6 months since its inception. Over the past 12 months, the fund hasn't had any negative monthly returns and therefore hasn't experienced a drawdown. Over the same period, the index's largest drawdown was -10.05%. Since inception in April 2018, the fund's largest drawdown was -0.02% vs the index's maximum drawdown over the same period of -12.97%. The fund's maximum drawdown began in March 2020 and lasted 1 month, reaching its lowest point during March 2020. The fund had completely recovered its losses by April 2020. During this period, the index's maximum drawdown was -0.28%. The Manager has delivered these returns with 2.3% less volatility than the index, contributing to a Sharpe ratio which has consistently remained above 1 over the past four years and which currently sits at 3.94 since inception. The fund has provided positive monthly returns 100% of the time in rising markets and 95% of the time during periods of market decline, contributing to an up-capture ratio since inception of 114% and a down-capture ratio of -74%. |
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| Fund Overview | Emerging markets refers to countries that are transitioning from a low income, less developed economy towards a modern, industrial economy with a higher standard of living and greater connectivity to global markets. The strategy is index unaware (meaning that the Skerryvore team decides to invest in individual stocks based on their merit and without reference to the composition of the Benchmark) and the Fund's country and sector allocations will reflect the active bottom up investment approach of the Skerryvore team. The Fund also invests in companies that are incorporated and listed in developed market countries which have economic exposure to emerging markets. The difference in allocation against any emerging markets index can be significant. |
| Manager Comments | The Skerryvore Global Emerging Markets All-Cap Equity Fund has a track record of 1 year and 2 months and therefore comparison over all market conditions and against its peers is limited. However, the fund has underperformed the ASX 200 Total Return Index since inception in August 2021, providing investors with an annualised return of -11.41% compared with the index's return of -6.14% over the same period. Over the past 12 months, the fund's largest drawdown was -13.9% vs the index's -11.9%, and since inception in August 2021 the fund's largest drawdown was -17.45% vs the index's maximum drawdown over the same period of -11.9%. The fund's maximum drawdown began in September 2021 and has lasted 1 year, reaching its lowest point during June 2022. The Manager has delivered these returns with 5.38% less volatility than the index, contributing to a Sharpe ratio for performance over the past 12 months of -1.5 and for performance since inception of -1.26. The fund has provided positive monthly returns 67% of the time in rising markets and 38% of the time during periods of market decline, contributing to an up-capture ratio since inception of -5% and a down-capture ratio of 49%. |
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Global Economic Outlook: a perfect storm abrdn September 2022 The global economy is facing multiple, mutually-reinforcing headwinds - a scenario which is likely to lead to a deeper global recession sooner than we'd previously forecast. We now expect the Fed's rapid policy tightening to tip the US into recession by Q2 next year. The UK and EU economies are facing a huge, commodity-price induced real-income squeeze, amplified by central bank actions. In China, the rebound from the Shanghai lockdown is petering out, with the prolonging of a 'zero-Covid' policy and property sector weakness weighing on the outlook. Meanwhile, many emerging and frontier economies are caught between their own imbalances and these external shocks. The compounding effect of these various shocks means that what once looked like a series of distinct headwinds emanating from different places at different times, are now coming together into something that looks like a perfect storm for the global economy. Figure 1: Global forecast summary Source: abrdn, as of September 2022 *Forecasts are offered as opinion and are not reflective of potential performance. Forecasts are not guaranteed and actual events or results may differ materially. No US recession this year…US economic activity experienced a sharp, commodity-price driven, slowdown in the second quarter, with the economy posting two consecutive quarters of contraction in the first half of this year. While some observers insist on describing this as a 'technical recession', this is neither the formal definition of a 'recession' nor was what we saw the phenomenon we have in mind when identifying a US recession. With employment growth throughout the first half of the year running well in excess of the rate required to keep unemployment steady, it's not credible to believe the US was experiencing the breadth and depth of downturn that would be consistent with a recession. If anything, underlying demand was still too strong, with imbalances continuing to build - especially in the labour market. In the very near term the economy looks set to accelerate, boosted by the recent fall in many commodity prices. …but we expect it to happen earlier next yearDespite this 'mini recovery', we now forecast the US economy to enter a recession two quarters earlier than we'd originally anticipated. The second quarter of 2023 is now expected to mark the formal end of the current economic cycle, due to more rapid and sustained monetary tightening by the Federal Reserve (Fed), and its transmission through asset prices. But we have more conviction in the recession's inevitability than its timing given the 'long and variable' lags of central bank monetary policy. Powell at Jackson HoleGranted, financial conditions eased following the July meeting of the Federal Open Market Committee (FOMC), which suppressed our short-term recession indicators. But this development predictably proved unsustainable as it reflected a misunderstanding of the Fed's reaction function. Fed Chairman Jerome Powell hammered this point home in his hawkish speech last month at Jackson Hole, the annual gathering of economic policymakers from around the world. That's why the Fed is likely to keep rates elevated, even as the US economy enters a recession, as it awaits convincing evidence that core inflation pressures have moderated (see Figure 2). Figure 2: Elevated core services inflation will keep rates high for longer Source: Haver, abrdn, as at September 2022 What this means for the rest of the worldThis will tend to exacerbate the global spill-overs, with the Fed continuing to export tight financial conditions to the rest of the world through the dollar-based financial system. Emerging market (EM) countries with large external imbalances are likely to be especially vulnerable given the risk of capital flight and currency crises. Even in EMs where external vulnerabilities are low, the global recession will weigh on growth via trade, financial and confidence channels. China's slowdown…China's 2022 growth target is out of reach while headwinds for next year are intensifying. Monetary policy may be easing, but it's difficult to gain traction while structural headwinds from Covid restrictions and the property slump remain in place. While an exit strategy for the country's 'zero-Covid' policy may be revealed during the 20th Party Congress in October, we now think an actual exit may have to wait until the third quarter of 2023. The ramping up of infrastructure spending will help to shore up growth and reduce the risks of a hard landing. However, there are limits to how much this will help. …Europe has its own problemsEven before the US recession hits, Europe faces the prospect of huge terms-of-trade, real income and energy shocks pushing the Eurozone economy into recession by the fourth quarter of this year. Our European gas-supply scenarios envisage further energy rationing to be phased in across various sectors, particularly in Germany. The risks may materialise into even more severe outcomes. Inflation is everyone's problem (for now)Near-term energy supply shortages should keep headline inflation elevated throughout the northern hemisphere winter, especially in Europe. Beyond the short term, however, the global recession will weigh heavily on commodity demand. Supply-chain bottlenecks continue to improve despite the effects of China's zero-Covid policies. As central bank monetary tightening starts to restrict product and labour demand, the scene will be set for significant disinflation - a slowing of price rises - throughout 2023 and especially 2024. With falling headline and core inflation likely to help re-anchor inflation expectations, monetary policy can return to supporting economic growth from the second half of next year. We anticipate the appropriate path for policy, given the likely increase in unemployment and fall in inflation, will see rates once again reach the effective lower bound for much of the developed world. Political changeThe US Inflation Reduction Act demonstrates the kind of constructive, albeit modest, and market-moving legislation that can be passed should the Democrats keep hold of both houses of Congress in November's mid-term elections. However, a Republican victory would usher in another period of stasis. Elsewhere, the upcoming Italian election is likely to result in a new right-wing government, which may exacerbate tensions with the rest of the European Union. In another sign of the impact of inflation on politics, the new UK government of Prime Minister Liz Truss has significantly shaken up the policy mix, with large macroeconomic and market implications. Similar moves are possible in other European countries. Meanwhile, the war in Ukraine will roll on, and sharpen the widening divide between the West and a more closely-aligned Russia-China pairing. Most-likely scenarios lead to recession…Not only does our base-case scenario involve a global recession (see Figure 3), but adding up the probabilities of all the scenarios consistent with recession gives a combined 55% probability. This means a global recession in one form or another is more likely than not, most probably within the next two years. Figure 3: We expect an even deeper, and earlier, global recession than we had previously forecast Source: abrdn, as of September 2022 We're still concerned about imbalances in the Chinese property sector on top of those already included in our base case, motivating our 'China stress and slowdown' scenario. We also think a Covid 'vaccine escape' scenario is still plausible given what we know about viral mutations. Both these scenarios remain consistent with a global recession, but with quite different drivers than in our base case. Meanwhile, we've recalibrated our 'stagflationary shock' scenario - based on expectations of European energy shortages and EM crises - so that it also leads to global recession. That said, another, more positive, scenario - 'Fed walks the tightrope' - may deliver a soft-landing for the global economy. But it would require a lot to go right for this to happen. Author: abrdn Research Institute |
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Funds operated by this manager: Aberdeen Standard Actively Hedged International Equities Fund, Aberdeen Standard Asian Opportunities Fund, Aberdeen Standard Australian Small Companies Fund, Aberdeen Standard Emerging Opportunities Fund, Aberdeen Standard Ex-20 Australian Equities Fund (Class A), Aberdeen Standard Focused Sustainable Australian Equity Fund, Aberdeen Standard Fully Hedged International Equities Fund, Aberdeen Standard Global Absolute Return Strategies Fund, Aberdeen Standard Global Corporate Bond Fund, Aberdeen Standard International Equity Fund , Aberdeen Standard Life Absolute Return Global Bond Strategies Fund, Aberdeen Standard Multi Asset Real Return Fund, Aberdeen Standard Multi-Asset Income Fund
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