Australian Secure Capital Fund - Market Update

Australian Secure Capital Fund

September 2023

Funds operated by this manager:

ASCF High Yield Fund, ASCF Premium Capital Fund, ASCF Select Income Fund

Market Commentary - August

Glenmore Asset Management

September 2023

Funds operated by this manager:

Glenmore Australian Equities Fund

Hedge Clippings | 22 September 2023

The US Federal Reserve put out their latest press release earlier this week, with a consistent message scattered through its 293 words: Inflation, mentioned 9 times, and 2 percent mentioned 4 times. With the current rate of inflation at 3.67% - up from 3.18% last month, although way down from 8.26% last year - there's still a long way to go. Maybe taming inflation is a bit like losing weight - (trust me, I know!) - the difficulty is the last part when things become really stubborn!

That seemed to be the message Jerome Powell and his fellow FOMC members wanted to get through - that the road to 2% is not going to be easy, so don't expect any early move on interest rates - at least not down. The market meanwhile didn't like it and responded accordingly.

Back home Australia's new RBA Governor Michele Bullock is unlikely to change her predecessor's approach when she chairs her first board meeting in a couple of weeks. Although she may use different words to Philip Lowe's "narrow road" rhetoric in the ensuing media statement, this is probably unlikely as well. As much as she'll want to stamp her individuality on the role, we also suspect that, having sat alongside her former colleague for so long, she'll be singing from the same song sheet. She's in a better position than the US, although there's still a long way to go. For a start, the RBA has a target band for inflation of 2-3%, whereas the US has a specific target of 2%.

On the other hand, Australia, particularly with its dependence on imported oil, is more of a price taker than a price maker when it comes to inflation - particularly with an upcoming El Nino event now almost certain.

There have been other hand-overs this week, each with their own twists and turns. Vanessa Hudson has taken over from Alan Joyce at Qantas and has taken no time to change his tune by apologising for past performances - something he was never known for. Not that Hudson had much choice. Meanwhile, Rupert Murdoch has finally stepped aside - well, sort of. We doubt if his influence will really wane until his eventual final exit, but even then, how different will Lachlan be, given his heritage and history?

Enough of business and economics. We're heading into footy finals season - or in the case of the Wallabies, possibly into the quarter finals of the Rugby World Cup, taking on Wales early on Monday morning (AEST). They'll need to have a massive turnaround to do so, based on the rubbish they dished up last week-end. If they don't, there'll be a few heads that will no doubt roll at Rugby HQ - starting with Coach Jones and Chairman McLennan.

In reality, rugby union in Australia already ranks far below the AFL, with 95,000 headed to the MCG for tonight's Preliminary Final. If the Wallabies can't make it past the RWC pool stage, interest in the game at international level will slip further - and possibly into insignificance.

You'd have to be an optimist - and an early riser - to get up at 5 o'clock on Monday morning to tune in. Hedge Clippings generally fits both of those categories, but sadly on this occasion, while we'd never say never, isn't optimistic!

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The good news? We're avoiding recession. The bad news? Living standards are going backwards

Pendal

September 2023

Australia is in a 'per-capita recession', which means economic growth is not keeping pace with population growth. TIM HEXT explains the problem and what's likely to happen next

AUSTRALIA'S national accounts -- quarterly estimates of economic flows such as GDP, consumption, investment, income and saving -- land two months after the end of a quarter.

Many therefore ignore them as old news.

But they are the most comprehensive picture of the Australian economy from a macro and micro lens.

So what does the latest data reveal about Australia at the end of June?

In short, it is a very mixed picture. More than ever how you are feeling depends on where you sit.

This ABS graph below shows the various contributions:

First, the good news. We are avoiding a recession.

GDP is 2.1% higher than a year ago, though slowing.

It's been 0.4% for two quarters now and will likely end the year near 1.2% -- slightly higher than the RBA forecast of 0.9%.

Inventories are unlikely to be a drag next quarter, but net trade should also stabilise.

Now the bad news. We are clearly in a per-capita recession.

In other words, this level of economic growth is not enough to keep pace with population growth.

Which means the average person is going backwards in their standard of living.

Our population grew by 0.7% in Q2, the economy only 0.4%. GDP per capita is now 0.3% lower than a year ago and 0.6% lower than six months ago.

We are importing growth, not growing from within.

Per-capita recession

Why are we in a per-capita recession?

We are seeing more hours worked as employment rises along with our population. But we are going backwards in GDP per hour worked -- down a staggering 2% in the quarter.

This is one of the worst results since deregulation in the 1980s.

Remember this is a volume measure -- not price or value.

Productivity is going backwards. It has now gone nowhere since 2016.

Put simply, the RBA is facing labour costs rising at 4% -- with stagnant or even negative productivity.

Unless businesses wear the squeeze, inflation is not coming back too far below 4% for some time.

Consumers tighten belts

How is the consumer holding up in the face of rate rises? 

Household consumption barely grew in the June quarter at 0.1%. Services were up 0.2% but goods were flat.

We are tightening our belts in discretionary spending, which fell 0.5%.

This is consistent with a soft landing and is not disastrous, at least for now.

Motor vehicle sales are still strong, so maybe cashed-up baby boomers are buying four-wheel drives for their lap of Australia.

Pandemic stimulus savings are a thing of the past -- the savings rate has fallen to a cycle low of 3.2%.

In the national accounts savings is a residual (income less consumption) and not directly measured -- so it is not always an accurate indicator.

But it shows buffers are falling, albeit very differently across age groups.

The growth we did have came through a rebound in export volumes and ongoing government investment.

This continues a pre-pandemic theme and shows as a country our ongoing reliance on these two sectors, which is concerning.

Likely we will commission another productivity report -- having ignored previous recommendations -- and kick the can down the road.

The immigration lever

In the near term, the RBA would be a little less comfortable about this national accounts picture.

But we think labour supply via immigration will push unemployment back up to 4% and ease some wage pressures.

This should buy the RBA more time while the full impact of 4% in rate rises in little over a year feeds through. (We are still only 80% of the way there).

If Australia was a company these accounts would be causing analysts to downgrade their outlook. Workers are less productive and costs are rising.

But some of this may still be the lingering impact of the pandemic. Cue discussions on working from home.

The RBA will be hoping this can turn around in the year ahead.

Immigration will slow in the next 12 months to around 1%, because the sharp increase in foreign student numbers was a one-off return from the pandemic.

An outright recession (not just a per capita one) is not a base case -- but the chances of it will rise.

Dr Bullock will be facing the dilemma of a slowing economy under full employment and high wages as she takes over as RBA governor in a fortnight.

We wish her luck trying to work out what all this means for rates.

Author: Tim Hext, Portfolio Manager and Head of Government Bond Strategies

Funds operated by this manager:

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at December 8, 2021. PFSL is the responsible entity and issuer of units in the Pendal Multi-Asset Target Return Fund (Fund) ARSN: 623 987 968. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient's personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com