Zurich Investments Managed Growth Fund (ZUR0059AU) Report & Performance

The Zurich Investments Managed Growth Fund rose by 1.66% in the June quarter.

Despite stiffening economic headwinds throughout most of the world, global equity markets advanced in the second quarter. In the US, the central bank took a breather in June on rate rises to assess the impact that the blizzard of rate hikes has had on the US economy. While the pause was expected, markets turned choppy in the final weeks of the quarter after the US central bank also warned that it could lift interest rates two more times this year.

The European Central Bank (ECB) implemented two rate hikes during the quarter and repeatedly warned that there would be no let-up in its aggressive effort to stamp out high price growth in Europe. In the UK, the Bank of England lifted rates in May and June and cautioned that further hikes were on the horizon if domestic inflation did not show clear signs of decelerating.

Developments in China remained a source of anxiety for investors. China has been confronted with the threat of low consumer inflation and plunging producer prices, raising fears that the world’s second largest economy was at risk of falling into a deflationary spiral. To spur domestic consumption and investment, China’s central bank cut its short-term lending rate in June, though the reduction was less than expected and fuelled expectations of further stimulus in the near term.

AREITs rose by 3.15% in the June quarter. The AREIT market performed strongly at the beginning of the quarter after the Reserve Bank of Australia paused its cash rate hikes in April. However, AREIT stocks declined in May as the market sold off in the face of the resumption of interest rate hikes. AREIT performance in June was marginally negative which was a relatively resilient result given 10-year bond yields rose to 4.02%.

Australian data releases throughout the quarter were mixed. The monthly CPI indicator rose 5.6% in the twelve months to May. Inflation at 5.6% was below market expectations of 6.1%. Household sector and housing activity are driving the slowdown, while population growth is providing some offset. Labour market conditions remained strong with the unemployment rate falling to 3.6%. CoreLogic’s national Home Value Index (HVI) moved through the fourth month of recovery from the trough in January rising 1.2% in May and 1.1% in June.

The Zurich Investments Managed Growth Fund rose by 1.66% in April.

Investors adopted a relatively cautious posture in April amid growing uncertainty about the global economic outlook. With the start of a new corporate earnings season and inflationary pressures continuing to exert themselves, the focus during the month was squarely on the two levers that set stock prices, interest rates and company profits. All eyes were on the US, where the Federal Reserve (Fed) is in the midst of its most aggressive rate-hiking campaign in over 40 years, raising its benchmark interest rate to its highest level since 2007 from its record low. Key domestic data released during the month suggested that the US economy had slowed in the first quarter, but inflation remained stubbornly high, leading to market expectations that the Fed would lift interest rates for a tenth consecutive time in May. The situation was equally challenging in Europe where data suggested that the economy grew only marginally in the first quarter, as high inflation led to stagnant consumer spending. In Japan, the TOPIX advanced but was a relative laggard, as the positive impact of a weak yen was partially offset by worries about how the country’s export-reliant economy would be affected by a possible global economic recession. Meanwhile, in emerging Asia, China’s stock market fell sharply on waning optimism of a further rebound in the Chinese economy amid signs that the country’s policymakers will not be providing additional stimulus measures.

Healthcare stocks performed well in absolute terms and relative to the broader market. In a period when stocks were volatile and investors generally favoured more value-oriented shares, healthcare was attractive for its more defensive characteristics. Earnings and innovation were also strongly positive.

The Zurich Investments Managed Growth Fund fell by 0.83% in February.

World equity markets retreated (in local currency terms) in February as investors were forced to re-set their expectations for the current global rate-hiking cycle. Against this backdrop, all eyes were on the US, where the most recent data suggested that the cooler domestic economy was still simmering. Investors cheered the Federal Reserve’s (Fed) announcement at the outset of February that it was raising its benchmark interest rate 25 basis points (bps), its smallest such increase since March 2022, and that it was seeing improvements in inflation. Over the course of the month, however, global stock markets struggled to gain traction after a steady flow of US data indicated that the labour market and consumer spending remained robust, and that price growth had re-accelerated in January, according to the Fed’s preferred measure of inflation. In light of these developments, investors were forced to raise their forecasts for how high the Fed will lift interest rates and how long it will keep them there.

A similar situation was playing out across the Atlantic, where the European Central Bank (ECB) lifted interest rates by 50 bps and vowed that there would be no let-up in its aggressive efforts to wring high inflation out of the eurozone, thus all but guaranteeing another 50-bp rate hike in March. Elsewhere in Europe, the Bank of England (BoE) also increased interest rates 50 bps as inflation in the UK slowed for a third consecutive month in January, though it remained in double digits. The rate increases by the ECB and BoE pushed their benchmark interest rates to their highest levels since 2008.

Health care stocks lagged as investors took profits from the health care sector. For example, the more defensive health care providers and services stocks lagged in the month after performing best in 2022. More growth-oriented health care equipment and supplies and biotechnology stocks held up better than the broad health care index.

The AREIT market fell in February by 0.36%. The Reserve Bank of Australia (RBA) raised interests rates another 0.25% in February, bringing the official cash rate to 3.35%. The Australian economy showed some signs of resilience during the month with gross domestic product rising for the December quarter. Retail sales bounced in February, though consumer confidence fell. House price declines stabilised for the month, but new home loans fell.

The Small Ordinaries Accumulation Index fell 3.9% over the month. Commodity prices were weaker, driven by USD strength amid higherthan expected inflation prints. Continued warm weather and lower spot gas prices saw thermal coal fall 23.5% m/m. Iron ore fell 3.8% and precious metals retraced with gold -5.2%. During the month, the Australian 10-year bond yield increased by 30bps, whilst the AUDUSD depreciated by 4.3%. The rise in yields reflected the RBA beginning the month with a more hawkish tone, outlining their intention to lift rates further. Interest rates will go higher, the extent and duration however will depend on how the RBA balances the persistence of inflation with softer domestic activity, modest wages growth and a weaker labour market.

The Zurich Investments Managed Growth Fund rose by 3.44% in January. After suffering through a dismal 2022, world equity markets rallied strongly in January, as renewed optimism about the global economic outlook put investors in a buying mood. The month was a volatile one, as investors grappled with two competing sentiments. On the one hand, there was anxiety about softening company profits and a global economy straining under the weight of a monetary tightening cycle, and on the other, there was hope that a severe worldwide economic recession could be avoided, and that cooling inflation will induce major central banks to ease up on their aggressive interest rate increases. Against this backdrop, all eyes were on the US, where the most recent data indicated that price pressures eased for a sixth consecutive month in December while the economy continued to grow. These positive developments stoked optimism that the Federal Reserve would be able to engineer a “soft landing” for the US economy, thus paving the way for the world’s most influential central bank to possibly end its rate-hiking campaign in the near term.

The buoyant investor mood was also found across the Atlantic, where the latest data indicated that inflation in the eurozone had cooled for a third consecutive month in January, thanks to a drop in energy prices, and the common currency bloc’s economy unexpectedly grew in the fourth quarter, compared with the previous quarter. While investors were confident that the eurozone could avoid a deep and painful economic recession, they nevertheless expected the European Central Bank to maintain its hawkish stance.

The mood was more sombre in the UK, where inflation slowed for a second consecutive month in December but was still running in the double-digits and the economy was on the cusp of a recession. Health care stocks declined and trailed the broader market for the month. Pharmaceuticals and health care providers and services dragged down the sector. In general, investors sold shares that held up better and bought those of last year’s losers. Health care continues to outperform the broader market over longer time periods.

The AREIT market surged during January with the strong performance driven by decelerating global inflation and the expectation that interest rate rises may be are nearing an end. The main outperformers in December included the fund managers which benefited from optimism around interest rates potentially falling. The main underperformers included the Long WALE and defensive stocks which had benefited previously from defensive buying in the face of potential recession and rising interest rates.

The local market enjoyed a strong start to the year with some of 2022’s worst performing stocks seeing a sharp reversal in January. The Small Ordinaries Accumulation Index was up 6.6%, in line with the ASX 200 Accumulation Index up 6.2%. Commodities had another strong month as iron ore, gold and copper all rallied. As such the small resources outperformed, up 7.3% against the small industrials, up only 6.3%. Australian 4Q22 inflation rose to 7.8% which was above consensus but still below the Reserve Bank of Australia’s 8% forecast. Expectations are for rates to be lifted a further 25 basis points in early February before pausing for several months. Despite this, consumer confidence is resilient, supported by 3.5% unemployment as of December. Housing continues to be a risk with prices having fallen 9% from their peak. Although household leverage is high, there have been no clear signs of financial distress yet. The upcoming February reporting period will be looked to as a bellwether for the remainder of the year.

The Zurich Investments Managed Growth Fund rose in the December quarter by 4.50%. Global equities rose solidly overall in the fourth quarter, belying a turbulent period that saw risk appetites wax and wane amid shifting market dynamics. Data suggesting that worldwide inflation may finally have peaked sparked a two-month rally starting in October on hopes that central banks would soon tap the brakes on their rate-hiking campaigns. However, despite the US Federal Reserve downshifting to a 50-bp hike in December, it signalled that it expected to raise rates higher than previously anticipated to manage domestic inflation that remains elevated. Key central banks in the UK and Europe quickly followed suit. The warning from these major central banks that they were committed to crushing stubbornly high inflation at a time when economies were already slowing, or in recession, dampened investor sentiment and drove global stock markets downward in December. Investors were also monitoring developments in China where President Xi secured an unprecedented third term, leading to a sell-off in the Chinese equity market as investors weighed up the implications for the Chinese economy. However, Chinese equities rallied in November and December after the government indicated they would be rolling back the strict ‘zero COVID’ policy in response to nationwide protests. Health care stocks produced solid gains and outperformed the broader market. Biotechnology stocks performed best, buoyed by several high-profile potential blockbuster drug approvals late in the year. Health care equipment and supplies stocks also performed well as medical device makers benefited from a rebound in procedure volumes and several notable new FDA approvals. The health care technology industry stocks declined as this growth-oriented industry tends to carry high valuations and requires ongoing spending to build out businesses, which made them vulnerable in an environment of slowing growth and rising financing costs. Health care technology was the only industry that declined during the period. The AREIT market rose by 11.56% in the December quarter but reversed some of its gains at quarter-end due to a solid increase in bond yields as central banks raised short-term rates and warned of more to come. Data on the Australian economy remained mixed. As was largely expected, the Reserve Bank of Australia (RBA) lifted the cash rate to 3.10% in December, the highest level since late 2012. Gross domestic product (GDP) rose but it was slightly softer than expected. Home values continued to fall, leaving values -5.3% lower over 2022, led by Sydney and Melbourne. However, Adelaide, Darwin and Perth were up for the year. Employment rose more strongly than expected in November and the unemployment rate remained unchanged as the participation rate increased. Housing finance approvals fell in October, with both investor and owner occupier loans moving lower.

The Zurich Investments Managed Growth Fund rose in October by 3.60%. Global stocks rallied in October as recession worries in many countries led investors to scale back expectations for the pace of central bank rate hikes. However, investors were disappointed by a lower CPI reading, as they had hoped for a more significant moderation in prices. Persistent inflation fuelled expectations that the US Federal Reserve will raise interest rates through year-end. Stocks in Europe and the UK gained despite slowing economic growth and inflation. While the European Central Bank announced its second-consecutive 75 bps rate hike, the cooling economy raised hopes for a slower pace of rate increases going forward. In the UK, expectations were for another central bank rate hike in November. Stocks in Japan ended the month higher in US-dollar terms as economic growth has improved moderately since the country ended lockdowns and restrictions on inbound travel. However, the pace of this improvement moderated in October.

Emerging market stocks declined and underperformed non-US developed markets due to weakness in China’s equity markets. Healthcare stocks rose more than the broader global equity market for the month and continue to outperform over longer time periods. Biotechnology and healthcare providers and services performed best. Biotechnology stocks continued to be buoyed by a wave of recent high-profile drug approvals, including the Biogen/Eisai breakthrough in Alzheimer’s treatment announced at the end of September. Healthcare providers and services benefited from a slowdown in the number of COVID-19 cases, while non-COVID-19 case volumes recovered gradually. The AREIT market surged in October, partly in response to more dovish remarks from the Reserve Bank of Australia (RBA), and central banks globally, about the slowing of the pace of interest rate rises.

The Australian economy was generally softer except for retail sales. The RBA raised to cash rate by 0.25% to 2.6% in early October, surprising the market that was expecting +0.50%. Employment growth slowed and unemployment was steady. Consumer confidence resumed its downward trend in October, but retail sales rose over the month and surged by 18.6% year-over-year. House prices continued to fall in October with declines in Sydney (-1.3%), Melbourne (-0.8%) and Brisbane (-2.0%). October continued what has been a very volatile calendar year with the Small Ordinaries Accumulation Index, rising over the month by 6.5%. This heightened volatility has been a common characteristic of global markets over the year as sharp increases in interest rates have left markets pricing periods where interest rates have plateaued and will fall, to then price a 180-degree different view where rates move higher. In essence, weight of money trying to back the right side of the interest rate trade is moving markets and this is increasingly looking like a random walk decision making tree based on the last published data point.