BT Index High Growth Fund (WFS0592AU) Report & Performance

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.

Share markets continued their upward momentum over the month as investors weighed in on the debate over ‘are we at peak rates and peak inflation yet?’. With support from strong employment data and a softening view on a global recession coming sooner than later, headwinds of house price falls, consumer sentiment waning, a cautious business community, and ongoing geopolitical forces centring around Europe and Asia, all seemed to take a back seat to investor concerns. As we look ahead to December, all eyes will be on the sustainability of this back-to-back monthly rally. Markets will be directing attention to data released for US payrolls, job openings, consumer spending, and the upcoming Fed meeting mid-month.

The Consumer Sentiment Index fell sharply to 78.0 in November from 83.7 in October. The read is now below the 79.0 recorded during the GFC and near the lows recorded during the deep recession of the early 1990s (64.6) and the initial phase of COVID (76.5). Interestingly, the divergence between consumer confidence and consumer spending is still quite wide. While consumer sentiment has been deeply pessimistic for most of this year, retail spending has remained resilient, although is now showing subtle signs of slowing. The source of this resilience could include the strength of the labour market, savings accumulated during the pandemic, or a larger proportion of households with fixed-rate mortgages – who haven’t yet felt the pinch of higher rates. Either way, it ironically appears that consumers are socialising in busy retail and hospitality venues talking about how bad the economy is.

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 com

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. 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. In late August, data showed the Australian unemployment rate dropped 0.1 percentage points over July to a fresh 48-year low of 3.4%. Employment unexpectedly eased, but there were several unique factors at play. It’s unlikely that the fall in July is the start of a new trend of jobs losses. There is now more than one job vacancy for every unemployed person and a further decline in the unemployment rate is likely.

In June we saw the release of NAB’s Business Confidence and Conditions surveys that saw a decline in business confidence of 4 index points to +6 in May. A range of factors are weighing on confidence among businesses, including elevated inflationary pressures, labour shortages, and supply-chain disruptions. The fall in consumer sentiment and increases in interest rates from the RBA are also likely weighing on business confidence. The prospect of continued pressure on global supply chains as China implements its zero-COVID policy, and the risk of a slowdown in global economic growth alongside central bank policy tightening, may impact confidence in the months ahead. Business conditions fell to +16 from a revised +19 in April. However, conditions remain elevated and well above the long-run average of +7.

The decline reflected a fall in the profitability and trading sub-indices. However, while both sub-indices pulled back from recent ten-month highs, they remain elevated and were at their second highest level in 11 months. Profitability and trading conditions had been improving over much of 2022 as restrictions across the country lifted and consumers adapted to living with COVID.