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This week's release of Australia's CPI result was not what anyone wanted to hear - unless you're a retiree wanting a higher yield on your term deposits.
31 May 2024 - Hedge Clippings | 31 May 2024
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Hedge Clippings | 31 May 2024 Inflation and Trump are both Sticking Around... This week's release of Australia's CPI result was not what anyone wanted to hear - unless you're a retiree wanting a higher yield on your term deposits. And even if you are, don't expect any media headlines about it. With the April inflation number up 0.1% to 3.6% - the second monthly rise in a row - all the focus on expectations for a rate cut can be pushed further out, and possibly even bringing the possibility of another hike before a fall. Even the 3.6% number, which included seasonally volatile components, obscured the underlying figure of 4.1%, which at least held steady since the previous month, albeit higher than February's rate of 3.9%. Drilling down through the numbers housing was up 4.6% as a whole, with rents up 7.5% - hence governments in general getting twitchy. Within the housing bucket, electricity rose 4.2% which doesn't sound too alarming until you factor in the various rebates on offer, without which the number would have been a whopping 13.9%. No wonder Jim Chalmers' budget included further handouts for electricity consumers! The other area sure to make it to the top of the news pile at present is the cost of housing, and as above, the cost of rents. Governments seem to have suddenly woken up to the fact that there aren't enough new dwellings to accommodate the rising population. April's dwelling approval data released by the ABS this week showed just 13,078 new approvals for the month, down from peak of 23,136 in March 2021, and only just higher than the 12,917 in June 2020 at the height of the COVID crisis. Given the population grew by 172,700 in the quarter to September 2023, and 659,800 over 12 months it doesn't take too much to recognise that much of the housing affordability crisis can be attributed to a severe imbalance between supply and demand. That's economics 101. The problem is that the undersupply has been growing for decades, with a current shortage of dwelling completions around 50,000 per year. Even with the current push to build more dwellings, the backlog won't be cleared in the next 5 or possibly 10 years. The issue is not just building approvals and completions. Availability - or lack thereof - of land, infrastructure, and critically a skilled labour force to actually build the dwelling, will all add to the problem. Governments may well like to say they're addressing the problem. The reality is that housing affordability will remain an issue way into the future. On a much shorter time frame, an equally sticky problem faces the US leading up to November's election. Trump's overnight criminal conviction won't change the view of his diehard supporters - if anything it will galvanise both Donald and his legions of MAGA fans. Equally, it will reinforce the opinion of dyed-in-the-wool Democrats that he's not fit for office. Trump's challenge, and Biden's opportunity, (and challenge) are the traditional conservative Republican voters who'll have an issue voting for either of them, and will thus stay at home on November 5th. Our guess is that the turn-out on the day will decide the race to the White House, not the criminal record of one candidate, nor the age of the other. You'd think that with over 333 million people (2022) and counting, either party could have found themselves a more suitable candidate? News & Insights Manager Insights | Skerryvore Asset Management Trip Insights: Asia | 4D Infrastructure April 2024 Performance News Digital Asset Fund (Digital Opportunities Class) Insync Global Capital Aware Fund |
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24 May 2024 - Hedge Clippings | 24 May 2024
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Hedge Clippings | 24 May 2024
News & Insights Market Commentary | Glenmore Asset Management Investment Perspectives: 14 of the most important charts for data centre investors right now | Quay Global Investors April 2024 Performance News Argonaut Natural Resources Fund Bennelong Emerging Companies Fund Delft Partners Global High Conviction Strategy |
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17 May 2024 - Hedge Clippings | 17 May 2024
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Hedge Clippings | 17 May 2024 The next federal election is not due for another year, but the budget handed down on Tuesday had all the hallmarks of a government preparing for the polls without actually setting the date. Jim Chalmers won't admit it, but based on this comment from Chris Richardson during the week: "If the enemy is inflation, the IMF says you should cut spending and raise taxes. Instead, we're getting a very big tax cut and almost matching that with large increases in spending," then we're heading for trouble. If Richardson is correct, and we're certainly not going to doubt him, then Chalmers is at odds with the IMF, as well as one of Australia's top economists. Meanwhile, Treasury (presumably the advice he's relying on) is at odds with the RBA's estimate of inflation as pointed out in this piece: "Treasury has inflation heading in one direction - down - while the Reserve Bank says the opposite. They can't both be right, and what happens will play an outsized role in deciding when, or if, the central bank cuts interest rates. The government claims the budget has been designed to take three-quarters of a percentage point off inflation this year and another half a percentage point next year, while unemployment will rise slightly to 4.5 per cent next year. Time will tell if Treasury or the central bank - which has forecast inflation to be 3.8 per cent in December this year - is correct. Without a rate cut, there is close to zero chance of an early election." So Jim's budget is increasing spending via handouts across the year, topped up by Stage 3 tax cuts due in July, and wage increases already announced or in the pipeline, hoping inflation will reduce to 2.75% mid next year (around the scheduled election time) while the RBA's own forecast is for it to still be 3.2%. Given the RBA's stated driver of interest rates is taming inflation, there's a chance of a rate cut - or possibly more than one - by this time next year, but only if their forecasts are correct, and it's a big IF based on the stickiness of inflation to date. In the government's favour, this week's employment figures (along with some positive signs from the US) showed unemployment creeping up to 4.1% on a seasonally adjusted basis. The RBA's other role of maintaining full employment is secondary to inflation, but it is noteworthy that the number of unemployed people has risen 13.7% from one year ago, and Michele Bullock is on record as saying an unemployment rate of 4.5% or above would be required to have a significant effect on reducing inflation. You can't blame the Treasurer for pitching the budget and blowing the "surplus" trumpet towards the next election - whether in December or in the first half of next year, but he is ignoring the longer term deficits. He'll worry about those in due course, or leave them to his successor. News & Insights Magellan Global Quarterly Update | Magellan Asset Management April 2024 Performance News Bennelong Long Short Equity Fund |
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10 May 2024 - Hedge Clippings | 10 May 2024
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Hedge Clippings | 10 May 2024 As widely expected the RBA kept rates on hold following this week's board meeting, surprising no one, except possibly those brave souls predicting either a rate cut, or even a couple expecting a rise. The bottom line is inflation at 3.6% is only slowly moving - at least not in the direction the RBA would like it to, and certainly not fast enough. Adding to their concerns underlying inflation is higher than the headline number and declining even more slowly, and services inflation is even more stubborn. So if no rate cut now, when? Based on all the numbers - and it'll be the numbers that count - not for some time yet, with the RBA's statement that the outlook remains highly uncertain hitting the nail on the head. Their current expectation is for inflation to return to the preferred 2-3% range in the second half of 2025, and the middle of that range - i.e. 2.5% - sometime in 2026. Between now and then there's a whole raft of uncertainty, and we would expect the RBA to be more inclined to raise rates if the numbers look bad, than to drop them on the back of one good month, or quarter. With Australian interest rates close to 1% lower than the UK (5.25%), lower than most of Europe - range 1.5% (Switzerland) to 50% (Turkey) and 1% lower than the US, like almost everyone else, we would expect any downward movement to be relatively slow. Meanwhile next Tuesday's budget is unlikely to help, neither will the release of April's Wage Price Index numbers the next day, and looking further out neither will tax cuts due in July. Unemployment is still (just) sub 4%, and while there are certainly pockets of the workforce and economy doing it tough, the fact of the matter is that the best news on the inflation front will be an unemployment rate closer to 5% - or more. If that were to occur, then instead of inflation being stronger, and rates being higher for longer, we'd all be talking about the R word. It's too early to start that conversation, but harking back to the RBA's release on Tuesday, they noted that household consumption has been particularly weak, and discretionary spending subdued. Whatever the numbers, predictably as ever, the RBA re-enforced their dual mandates - price stability (in other words inflation) and full employment, with returning inflation to target being the priority. Turning to fund performances, and with almost 70% of April results in to date, for the first time this year there were widespread negative returns across nearly all peer groups, with the exception of Alternatives, Debt, Private Credit, and Asian Equities. That still leaves all peer groups in positive territory over 1, 3, and 5 years, with only the Property sector struggling over successive years. Property is of course notoriously sensitive to interest rates, so we were fortunate earlier this week to catch up with Winston Sammut from Euree Asset Management's A-REIT Securities Fund to discuss both the RBA's decision, the outlook for inflation, and the varied nature and sectors that make up the overall property market. While Winston is a veteran of the sector, his Euree A-REIT Fund is relatively new, launched last August. In spite of that, the Fund is topping the Property Peer Group over the last 6 months with a return of almost 27%. You can watch the interview below (recorded with the assistance of, and in the studios of Finance News Network) and see the Fund's Profile here. News & Insights Managers Insights | Euree Asset Management Powering up European network investment | 4D Infrastructure 420 billion reasons to invest in pets | Insync Fund Managers April 2024 Performance News Bennelong Australian Equities Fund 4D Global Infrastructure Fund (Unhedged) Glenmore Australian Equities Fund |
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3 May 2024 - Hedge Clippings | 03 May 2024
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Hedge Clippings | 03 May 2024 Jerome Powell's press conference following the US Federal Reserve's FOMC meeting held front and centre attention this week. He started with the good news, saying there's been "considerable progress" towards the FED's dual mandate to promote maximum employment and stable prices - with inflation easing over the past year, and a strong labour market, before quickly pivoting to the bad news - inflation is too high, progress in bringing it down is not assured, and the path forward is uncertain. As such, inflation is showing a lack of progress towards their 2% target, while economic activity is expanding at a "modest pace" consumer spending is robust, the labour market is tight with unemployment at 3.8%. Hence the bottom line was rates stayed on hold at 5.25 to 5.5%. Previous expectations for a May rate cut have gone out the window, and while Powell indicated it's a "meeting by meeting" decision making process based on the data, he considered a rate hike is unlikely. Longer for stronger seems to be the market's mantra and expectation, with expectations for just one or possibly two cuts later this year, a far cry from the six cuts that had been penciled in at the start of the year. For rate cuts to eventuate, Powell said inflation is going to have to move down, not sideways as it is now, or the labour market is going to have to weaken. However the 2% inflation target is the key, not employment or wages. Overall Powell's favourite word in his conference seemed to be "confidence" either lack of it, or needing it before taking action. Locally next Tuesday sees the RBA take their turn, and like the situation in the US, the Board's view will depend on the data. Household spending slowed further in March, growing just 2.1% vs 4% in February, and retail trade numbers are due next week, and are also expected to be under-whelming. In spite of this, and with the most recent CPI number at 3.8%, and wage rises and tax cuts around the corner, makes a rate cut here equally unlikely with market pundits now pushing rate cuts out until 2025. The RBA's inflation target is higher than the FED's hard 2%, but neither want to admit that their respective targets - while admirable - might be too low for the current environment. To do so would be to admit defeat, and neither will want to go down that path. News & Insights Managers Insights | Glenmore Asset Management New Funds on FundMonitors.com Market Update | Australian Secure Capital Fund 10k Words | Equitable Investors March 2024 Performance News Insync Global Capital Aware Fund |
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26 Apr 2024 - Hedge Clippings | 26 April 2024
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Hedge Clippings | 26 April 2024 The "stronger for longer" inflationary thesis gained further strength this week both locally and in the US, with the added problem that growth is slowing while inflation refuses to do so. News & Insights New Funds on FundMonitors.com US wildfire risk rears its head again | 4D Infrastructure March 2024 Performance News |
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19 Apr 2024 - Hedge Clippings | 19 April 2024
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Hedge Clippings | 19 April 2024 US Fed Chair Jerome Powell has been walking back - or talking back - expectations for an imminent rate cut in the US for some time now. At the end of last year, market expectations were for the Fed to cut up to six times this year. Following the Fed's March meeting Powell told a Senate committee hearing that they (cuts) were "not far" which resulted in the market expectations being reduced to three. At the beginning of this month, Powell was saying cuts were still likely, but only "at some point". This week he's saying rates can stay at current level "for as long as needed" if higher inflation persists. And it seems it is. Based on the latest US figures, the economy is running well, and as a result annual inflation to March came in at 3.5%, up from 3.2% a month earlier. There's even talk that the next move from the Fed may be up, which would require a major change of view from Powell from just three months ago. Our view has long been that following the spike in inflation post Covid, and then the seemingly quick reversal, the final one to two percent reduction to a hard target of 2% was always going to be difficult, unless of course there was a recession or hard landing. Currently, that hard landing scenario seems unlikely both in the US and locally. Even though March unemployment rose slightly in Australia to 3.8%, it is still a long way from the level Michele Bullock indicated it would need to be to cause an issue. Still at home, Australia's CPI numbers are due next Wednesday and will be crucial to the RBA's thinking. February's seasonally adjusted CPI number year-on-year was 3.7%, up from 3.5% in December, and just as it is in the US, that's heading in the wrong direction. There's a real risk that consumers get used to inflation between 3-4%, possibly just thankful it's half the level it was a year ago. With wage rises well above that in many sectors, along with government largess and generosity, and Stage lll tax cuts just around the corner, the RBA's fear of entrenched inflation of 3-4% is all too real. News & Insights New Funds on FundMonitors.com Manager Insights | 4D Infrastructure Market Commentary | Glenmore Asset Management Investment Perspectives: Aussie interest rates are heading for zero (again) | Quay Global Investors March 2024 Performance News Bennelong Long Short Equity Fund Skerryvore Global Emerging Markets All-Cap Equity Fund Argonaut Natural Resources Fund |
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12 Apr 2024 - Hedge Clippings | 12 April 2024
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Hedge Clippings | 12 April 2024 It was only a couple of months ago that the "market" (i.e. bond traders and economists) was firmly of the opinion that the US Federal Reserve would cut interest rates up to six times this year - starting about now. Fast forward to "now" - actually last Wednesday - and the market views that the cuts, or possibly cut, (singular) won't arrive until much later in the year, possibly not until November. Some - including former US Treasury Secretary Lawrence Summers - warned that the next move might even be up, not down. The cause of this market re-think were the US CPI numbers for the 12 months to March which rose by 3.5% over the past 12 months, up from 3.2% in February, having previously peaked at 9.1% post COVID back in 2022. Excluding volatile items such as food and energy it left core inflation unchanged at 3.8%, but for a market that was hoping for, (but not expecting) a reduction, this was not the news they were looking for. Aside from higher food and fuel prices, the strength of the US economy, and the jobs market in particular, is not helping the Fed's task of cutting rates following their next meeting on the 1st of May. Over 300,000 jobs were added last month in the US, the largest gain in almost a year, against expectations of just 200,000 resulting in a jobless rate of 3.8%. In turn, this cast doubts on the argument that continued high US interest rates of 5.25% to 5.5% would damage the economy. Simply put, it seems that while the Fed is concerned about inflation above 2%, the average consumer is not - or is at least dealing with it, particularly if they have a job, which most do. Much the same logic applies in Australia, albeit the numbers are a little different. December quarter CPI was 4.1%, and on a monthly basis in the 12 months to February it had dropped to 3.4%, although excluding volatile items such as fuel, fruit and vegetables etc., it was higher at 3.9%. Unemployment is low at 3.8%, or seasonally adjusted 3.7%. The RBA's cash rate is at 4.35%, and with some inflationary pressures coming through from recent wage decisions, higher oil prices, and July's Stage lll tax cuts, prospects for a rate cut aren't looking too good. However, looking at the latest Housing Finance figures for February, this doesn't seem to be holding most borrowers back. Year on year, total housing finance rose 13.3%, with investors leading the charge up 21.5%, versus owner occupiers at 9.1%. However, all this is likely to do is confirm, or continue, the chronic housing shortage in Australia, as evidenced by the Building Activity statistics released this week. On an annual trend basis to December the number of total dwellings commenced fell by -15%, and the number completed fell by -2.4%. Meanwhile net overseas migration rose by 518,000 in 2023. As such, that level of increase will keep the economy growing (as it has done for decades), make the RBA's inflation target of 2.5% harder to achieve, and underpin, if not continue, to increase property prices. As in the US, while sections of the media and social services point to high inflation, maybe the average consumer is learning to live with it, and just get on with life. In turn that can lead to entrenched inflation, above the RBA's target, hard to achieve - a situation they're keen to avoid. News & Insights New Funds on FundMonitors.com Fund Monitors | Portfolios March 2024 Performance News Bennelong Australian Equities Fund Delft Partners Global High Conviction Strategy Bennelong Concentrated Australian Equities Fund 4D Global Infrastructure Fund (Unhedged) |
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5 Apr 2024 - Hedge Clippings | 05 April 2024
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Hedge Clippings | 05 April 2024 US Federal Reserve Chairman Jerome Powell pushed back expectations for an early (and multiple) cut to interest rates, saying they're still likely, but only at "some point" this year, saying that "solid growth, a strong but rebalancing labour market, and inflation moving down towards 2 per cent on a sometimes bumpy path" was going to make the timing of an easing - and possibly even the outcome - anything but certain. The same can be said about the timing of a rate cut in Australia, with expectations being pushed out, and the market pricing in only a 10% chance of a move (down) at the RBA's May meeting. The AFR reported this week that the median forecaster in their survey of 39 economists is tipping November before there's a cut, but their expectations have been extended for the past year. News & Insights New Funds on FundMonitors.com 10 cognitive biases that can lead to investment mistakes | Magellan Asset Management |
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28 Mar 2024 - Hedge Clippings | 28 March 2024
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Hedge Clippings | 28 March 2024 Taylor Swift saved the day for February retail sales - or possibly just diverted the consumers' spending away from their normal patterns. Without the one-off impact of 600,000 "Swifties" (including Albo, who took time off from the affairs of State to attend at least one of the seven concerts) the month's retail sales at 0.1% would have only just made it into the positive. Add in the combined effect of concert tickets, clothing, merchandising, accessories, and dining out, and the number nudged up to 0.3%. While some of that would have diverted spending from other outlets and spending, much of the hard earned cash of the Swifties would have left with Taylor herself partly as ticket sales, and partly royalties on clothing and merchandise. News & Insights New Funds on FundMonitors.com Market Update | Australian Secure Capital Fund February 2024 Performance News Bennelong Australian Equities Fund Digital Asset Fund (Digital Opportunities Class) |
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