Perpetual Wholesale Conservative Growth Fund (PER0077AU) Report & Performance

Global financial markets consolidated in July following a strong first half for risk assets.

– US equities (+3.2%) rallied, outperforming the broader developed market (+2.9%). Performance during July was more broad based than recent months in contrast to the strong year-to-date returns which have been concentrated in a narrow group of large cap tech stocks. Indeed, traditional cyclical sectors including financials (+4.8%) and materials (+3.9%) outperformed most tech related sectors such as IT (+2.6%) and consumer discretionary (+2.3%).

– Meanwhile, Australian equities (+2.9%) were supported by the RBA’s decision to keep rates on hold as well as the rally in traditional value sectors such as financials, materials, and energy.

– Elsewhere, Emerging markets (+6.1%) performed strongly, led by China (+10.1%) which recovered its 2nd quarter losses, supported by regulatory easing and expectations of increased stimulus.

– In fixed interest markets, the US 10-year yields (+14bps) rose further as the US Federal Reserve (The Fed) raised rates another 25bps to 5.25%-5.5%, whereas Australian 10-yr yields rose marginally while the short end of the curve rallied as the RBA left the cash rate (4.1%) unchanged for a second meeting of the past four, which suggested that official Australian interest rates are close to peaking.

– In credit markets, both USD and EUR denominated credit rallied, as economic data which detailed resilient economic growth and falling inflation provided some optimism to investors that the odds of a US soft landing from 16 months of aggressive rate hikes were higher than previously thought.

Financial markets were mixed in May following a robust start to the year across almost all asset classes (with the notable exception of commodities). This strong first half has been despite headwinds including moderating earnings growth, tightening monetary policy, a potential US treasury default, turmoil in US regional and global banks and concern over a looming credit withdrawal. While US equity performance has been wholly reliant on the positive contribution of high growth tech stocks, more traditional value markets such as Europe, the UK and Japan have also performed well.

– During May, US equities (+0.4%) ticked marginally higher, however this masked a widening gap between the performance of value stocks and sectors (-3.9%) and growth (+4.6%) led by the strong performance of the tech giants.

– Japanese equities (7.0%) were buoyed by attractive valuations, the depreciating Yen and the return of inflation after years of deflationary conditions. Meanwhile, Chinese equities (-8.2%) continued to recede from their post reopening peak as economic growth indicators weakened.

– European equities trailed the broader developed market with French stocks (-3.9%) falling sharply. The value correlated UK market (-4.9%) underperformed, reflecting the broader relative outperformance of growth stocks.

– Australian equities (-2.5%) underperformed developed markets on the back of hawkish monetary policy expectations and weakened materials demand.

– Domestic bond yields sold off over the month with 10-year yields rising 26bps to 3.6%. US (+19bps) ten-year yields also rose during the month while the short end saw elevated volatility as the fight over increasing the debt ceiling continued until the end of the month.

We continue to observe a disconnect between the strength of the US equity index returns and weakening economic indicators and corporate profits. The US equity market continues to be led by the large cap tech giants which have benefitted from moderating long term bond yields over the first half of 2023 and robust earnings results. US equities outside of the largest market cap stocks have starkly underperformed, suggesting that the market is pricing in weakening corporate profits, but this is being masked by rising valuations of a select few firms.

There was a reversal of fortunes in equity and bond markets in February as a series of strong economic data saw a repricing of monetary policy expectations.
– US equities (-2.4%) gave back a portion of their 2023 gains mainly due to a sharp repricing of the US Federal Reserve’s (the Fed’s) rate expectations. US equities weighed on the broader developed market index with the MSCI World (-1.5%) also falling in February.
– European Equities (+1.9%) – led by France (+2.6%) and Germany (+1.6%) – were more resilient, supported by the improving economic outlook for the region.
– Australian equities (-2.5%) were lower following a strong start to the year as rising bond yields and interest rate expectations weighted on stock valuations.
– Chinese equities (-9.9%) gave up almost all of their year-to-date gains as US-China tensions escalated and the US Dollar rallied.
– US bond yields moved higher over the month and the yield curve inversion intensified to a 4-decade high as 2-year yields spiked. Australian yields also rose, and the curve flattened as short end yields moved sharply higher.

During the quarter, the Fund’s US duration was increased while remaining underweight and short of benchmark duration. The Fund’s exposure to US and Australian government bonds remains partially offset by a small, short (negative) position in Japanese bonds. This position performed well over the quarter as the Bank of Japan elected to relax its yield curve control measures, precipitating a selloff in long term yields. The Fund’s elevated cash allocation detracted from performance over the quarter.

The Fund maintains a significant foreign exchange exposure, diversified across a number of developed and emerging market currencies. The Fund’s USD exposure detracted from relative performance over the quarter as the greenback gave back a portion of its gains over the year. The Fund has direct exposure to the USD as well as a USDCNH call option and emerging market currencies which are closely correlated. The Fund maintains its position in the Diversified Real Return Fund which continues to deliver low volatility absolute returns while retaining a relatively low correlation to equity markets.

• Global equity markets rose in November as investors anticipated a slower pace of monetary tightening and lower terminal rates.
• US equities (5.6%) extended their October rally, pushing higher throughout the month before surging on the last trading day following dovish comments in a speech from US Federal Reserve (The Fed) chairman Jerome Powell.
• Emerging markets (11.7%) outperformed developed markets (5.7%) led by surging Chinese equities (28.4%). Hong Kong equities (26.8%) had their strongest month since 1998.
• Australian equities (6.6%) responded well to the slowing pace of rate increases from the Reserve Bank of Australia (RBA).
• European equities (9.7%) continued to rally strongly with gains from Germany (8.6%) and France (7.6%) as well as the UK (7.1%).
• The US 10-year bond yield (-38bps) rallied back below 4% on the back of below expectation October CPI print. We maintain our view of the key pressures currently weighing on the market outlook.
• Even though equity valuations have improved this year, they still remain above levels which are attractive, given the weakening earnings backdrop across most regions.
• Inflation and the tightening of monetary policy has caused a nasty bear market in government bonds and much tighter liquidity conditions.
• A slowdown in economic growth with elevated recession risks in the US and Asia and acute recession risk in Europe have contributed to a moderation in profit growth with a significant fall in profits in prospect next year.
• Growing geo-political risks in Europe due to the Russia/Ukraine war and in Asia reflecting a much more assertive China and heightened tensions over Taiwan’s future.

Global equity markets recovered in October as investors priced in a slower pace of central bank tightening.
• US equities (8.1%) rallied strongly as less hawkish dovish monetary policy speculation. At the same time, disappointing earnings in the US tech sector contributed to value sectors substantially outperforming growth.
• Australian equities (6.0%) rebounded underpinned by a smaller than expected policy tightening by the RBA.
• Another sharp decline for Chinese equities (-16.4%) saw emerging markets (-2.6%) significantly underperform developed markets (7.2%).
• European equities (9.1%) surged, with strong performance for Germany (9.4%) and France (8.75%). UK equities (3.0%) trailed developed markets as the recent unfunded fiscal expansion was unwound and the Bank of England temporarily ceased its tightening cycle to offer monetary support.
• The US 10-year bond yield (+28bps) continued to rise, ending the month above 4% for the first time since 2008 with the YoY rise the steepest since 1984. Elsewhere, bond yields were mixed with Australian 10-year yields falling as the RBA slowed its monetary tightening during October.
• Commodities were also mixed with energy commodities rising amid OPEC production cuts whereas materials including Iron Ore (-6%) fell on soft Chinese demand.

We maintain our view of the key pressures currently weighing on the market outlook.
• Even though equity valuations have improved this year, they still remain above levels which are attractive, given the weakening earnings backdrop across most regions.
• Inflation and the tightening of the monetary policy has caused a nasty bear market in government bonds and much tighter liquidity conditions.
• A slowdown in economic growth with elevated recession risks in the US and Asia and acute recession risk in Europe have contributed a moderation in profit growth and this is expected to continue.
• Growing geo-political risks in Europe due to the Russia/Ukraine war and in Asia reflecting a much more assertive China and heightened tensions over Taiwan’s future.