• Government relief spending from the developed economies around the world helped fuel inflation expectations
  • Optimism was boosted by some strong economic data in the US and Europe
  • More than 900,000 US jobs added in March as vaccinations spur return to normal
  • US$1.9 trillion relief package bill signed into law by President Biden
  • European equity markets post strong returns in March
  • Economic data emanating from Europe confirms recovery well underway
  • ‘Third wave’ forces more lockdowns in France and Germany
  • Better-than-expected economic growth meant the UK looks set to avoid double dip recession
  • China’s equity market underperformed as new economy plays suffered amidst tightened regulatory measures
  • Japan’s equity market ended higher helped by improved global growth outlook
  • Government bond yields continued to rise during March. The main drivers were optimism over the vaccine roll-out programmes in the US and UK, as well as concerns about the inflationary impact of the economic stimulus being provided by central banks and governments
  • Corporate bonds held up reasonably well. The more interest rate sensitive investment grade market saw the weakest returns. However, high yield credit spreads continued to tighten
  • The Australian economy has performed better than expected since the onset of the pandemic and much better than some other advanced economies. In its February 2021 Statement on Monetary Policy the Reserve Bank of Australia indicated that the Australian economy had begun to recover in the second half of 2020, much earlier than expected
  • A ship blocking the Suez Canal since 22 February was set free on 31 March. The blocking of the Suez Canal reduced global trade by almost $9 billion a day (12% of daily global trade).

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Impact of COVID-19 in October

  • Along with high rates of infection in the US and elsewhere, the surge in infections had economists scrambling to re-assess recovery trajectories which also dented market confidence. Asia was a bright spot as the largest economies there appeared to be avoiding the worst.
  • New deaths in developed countries remain below April highs despite new cases being far higher. However, deaths are rising rapidly in Europe as are hospitalisations which is threatening to overwhelm the health system in some countries.
  • Global equities declined in October. The US presidential election and rising Covid-19 cases in many countries, notably across Europe, were the main focus for investors.
  • The 2020 US election comes at a historic time, with the global economy in the grips of a pandemic, central banks unleashing massive stimulus and trade relationships fraying.
  • The IMF has predicted that China’s economy would expand by 1.9% in 2020 following its rapid recovery from the coronavirus pandemic.
  • Compared with other global equity markets, Australia performed well in October. The US S&P500 Index was down -2.8%, the Nasdaq down -2.3% and the Dow Jones lost -4.6%. European markets were very soft on new lockdowns with the UK FTSE100 down -4.9% and the German DAX tumbling -9.4%.
  • The ASX edged higher +1.9% in October as deal making helped to offset rising COVID-19 infections in the northern hemisphere and amid increasing nervousness around the looming US election.
  • In Australia, consumer confidence continued to rise, NAB business conditions rebounded further to +0.4 in September (previous: -6.2), and business confidence rose to a still weak -3.8 (previous: -8.2). The October Westpac Melbourne Institute consumer sentiment rose 11.9% (previous: +18.0%).
  • Domestically, Governor of the RBA, Philip Lowe, confirmed that based on the local economy’s current outlook, the cash rate is not expected to increase for at least three years.

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2020 Year in Review

The year 2020 will go down in history as one of the most unprecedented and challenging years of modern times. From the Australian bushfires to COVID-19, Black Lives Matter and the US election, it has been a tumultuous year of change. However, 2020 did finally turn out far better for diversified investors than had been feared when the pandemic hit triggering plunging share markets and deep recessions.

US indices continued to hit record highs as the virus ripped through the country boosted by Thanksgiving get togethers however President Trump’s signature on a massive stimulus bill was enough to stoke markets.

Europe and the UK finally agreed terms for the post-Brexit trade deal. The jury is still out on its content but the cliff-edge no deal scenario was averted just before Christmas.

A drifted dollar and an optimistic outlook also saw emerging market assets cap a good year with some healthy gains. Central banks continued to shower markets with stimulus gifts over the festive period, which provided further confidence to investors looking at riskier assets.

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Market Commentary Financial Year Ended 30 June 2021

Remarkable Returns from Equity Markets Drive Superannuation Fund Returns in FY21

2020-21 (FY21) Financial Year COVD-19, lockdowns and vaccinations could not deter the Australian financial market from posting another solid year and providing members of superannuation funds with stellar returns. As we reflect on the financial year, the month of June 2021 is the twelfth month in a row we have seen positive results for the median balanced fund and double-digit returns for the year ending 30 June 2021.

As in past years, markets had to contend with a range of geopolitical issues, some new while others like Brexit were all too familiar. The US Presidential election in November 2020 was a major focus for markets. The strong performance of the US economy at the beginning of the year was expected to favour the incumbent President Trump. However, the economic damage caused by COVID-19 and the indifferent and inadequate response by the Trump administration to the worsening health crisis enabled the Democratic nominee Joe Biden to win the Presidency with most Electoral College votes.

The Brexit saga continued to unfold through the year. After securing parliamentary agreement early in 2020 for the withdrawal, the terms of Britain’s exit from the EU were finally agreed between Brussels and London and ratified just days before the 31 December deadline. While the agreement means there will be no tariffs or quotas imposed on trade between Britain and the EU from 1 January 2021, the terms of the 1,200+ page agreement which cover living, working, trade and a multitude of issues between them are complex and may present unexpected challenges ahead.

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Market Review September 2021

  • Good news is that 63% of Australia’s whole population has now had at least one vaccine dose and in NSW its now 70%
  • IFM warns that elevated energy prices could begin to chip away at global growth because inflation will persist if energy prices remain high
  • US has more than a million job vacancies leading to wage rises and annual inflation running at more than 5%
  • Expectation that US Federal Reserve will ease its purchasing of bonds with the expectation that yield will rise
  • UK economy growing less than expected, recovery being squeezed by supply shortages and a jump in the cost of goods
  • Inflation in the eurozone hits its highest level since 2011, 3%, German inflation rises to 4.1%, its highest level since 2008
  • A standard-sized shipping container through the Panama Canal – from China to the US costs $US54,320 (A$73,935), this time last year it was $8.820
  • Chinese developer Evergrande missed two bond holder payments in September and carries an extraordinary $400 billion debt, expected to impact China’s property sector
  • RBA Governor Lowe upbeat – but pushes back against market expectations for the start of rate hikes next year
  • Australian unemployment rate fell to 4.5%, the lowest in almost 13 years but effective unemployment rate is higher at 6.3%
  • Australian consumer and business confidence are proving resilient compared to last year likely reflecting more confidence that government support will work
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Market Review December 2021

The availability and rapid distribution of vaccines enabled the global economy to re-open in 2021. With the approval of several vaccines in early 2021, the main developed economies started aggressive, mass scale vaccination programs. While the level of vaccines varied across countries, the overall results are better than expected. Most developed economies have achieved a vaccination level of around 70%. These are impressive results given logistical challenges and vaccine hesitancies. However, the emergence of the more infectious Delta variant means that the threshold for herd immunity is significantly higher, leading to waves of pandemic and episodic regional lockdowns. By the end of 2021, most of the main developed economies have adopted a “living with the virus” approach which reduces the level of economic disruption.

The main developed economies enjoyed robust, if uneven and volatile, economic growth in 2021. Episodic outbreaks of the pandemic led to more localised lockdowns and disruptions which were temporary in nature. Among the major developed economies, the US will likely record GDP growth of around 5.6% in 2021, compared to 5.0% for Europe, 2.3% for Japan and Australia’s 3.8%. While the likely GDP growth figures are inflated by the Coronavirus driven low GDP levels in 2020, they still represent a very sharp economic recovery. China, despite negative headlines and sharply decelerating growth in the second half of 2021, will likely grow by around 8.0% in 2021 which is still very robust.

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Market Review March 2022

  • Global markets made a negative start to Q1 2022 as the shock of Russia’s invasion of Ukraine reverberated around the world
  • European markets fell in Q1 2022 in the wake of the Russian invasion of Ukraine, markets experiencing a technical correction (-10%).
  • Commodity prices soared given Russia is a key producer of several important commodities including oil, gas, and wheat.
  • Brent crude and Western Texas intermediate oil prices hit highs in the wake of soaring global energy prices
  • US headline inflation hit 7.5%, resulting in further tightening by the US Federal Reserve.
  • Fight against rampant inflation took a decisive turn as the Bank of England (BoE) raised interest rates for the first time in three years.
  • Elsewhere, Chinese equities were negatively affected by renewed Covid-19 outbreaks, leading to major lockdowns in some major cities.
  • Bond yields rose sharply (bond prices and yields move in opposite directions), experienced negative returns due to ongoing inflationary pressure.
  • March 2022 quarter for the US; S&P, Dow Jones, and NASDAQ was the worst period since the first quarter of 2020.
  • Conversely, Australian markets were buoyed by the increase in commodity prices, miners, oil and gas producers and agricultural names all benefited from higher prices caused by supply concerns.
  • The Australian stock market managed to produce a positive return for Q1 2022 of +2.2%, driven by strong gains in Energy, Materials and Financials versus the S&P500 of -3.7%.
  • March 2022 was the worst month in history for the Aussie bond market, down -3.75%.
  • 2022-23 Australian Budget allows for more spending and lower budget deficits, temporary cut to fuel excise, more spending on infrastructure and defence and assistance to home buyers.
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Market Review September 2022

  • After a rally in July, both global shares and bonds turned lower and registered negative returns for Q3
  • Any hope of interest rate cuts was dashed as central banks reaffirmed their commitment to fighting inflation
  • The US Federal Reserve (Fed), European Central Bank (ECB) and Bank of England (BoE) all raised rates over the quarter
  • The US Fed raised the federal funds rate by 75 basis points (bps) to 3.25% in September, the third consecutive 75bps increase
  • The ECB raised interest rates in July and September, taking the deposit rate to 0.75% and refinancing rate to 1.25%
  • Annual inflation for eurozone was estimated 10.0% in September, up from 9.1% in August
  • Liz Truss was elected as new Conservative Party leader and hence as UK prime minister
  • UK pound hit a record low against the US dollar, close to parity as investors concern grew over the fiscal policy announcements
  • Emerging markets underperformed their developed counterparts as broad macroeconomic volatility and currency weakness took a toll
  • Poland, Hungary, and the Czech Republic equity markets were big decliners as the Russian war in Ukraine escalated
  • Continued macroeconomic headwinds meant US markets ended Q3 down with concerns about growth expectations and refreshed recession fears
  • The Australian sharemarket managed to gain 0.4% in Q3 better than the -4.9% decline in the S&P 500 and the -8.0% drop in emerging markets
  • Fixed income markets continued to suffer, especially the UK with the arrival of a new government with new policy
  • Australian household wealth fell 3.3% in the June quarter after 8 quarters of strong growth as shares, bonds and property prices declined
  • Commodities declined, driven lower by weaker prices for energy, industrial and precious metals
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Market Review December 2022

2021-22 (CY22) Calendar Year was a year to forget. After a bull market that lasted for more than a decade
since the GFC of 2008-09, markets around the world experienced a massive pullback. Both conservative investors with a concentration to high-quality bonds or high-risk investors with an allocation to technology stocks, incurred losses. In fact, 2022 was just one of five in the last 100 years where both US Treasuries and the S&P 500 finished in the red.

What largely drove the bull market between 2009 and 2021 were a few separate but related themes; outburst of revenue growth in high-flying sectors such as information technology and communications services, low inflation, and a very prolonged period of low-interest rates, coming out of the GFC. Persistently low-interest rates not only resulted in a low cost of capital for companies in growth mode but also caused investors to give very high multiples to companies who delivered high sales growth rates. In many cases, these companies were and are far from profitability.

2022 marked a dramatic change in investor psychology. For years, but particularly since the start of the COVID pandemic, the old standby valuation metric of price/earnings was ignored in favour of the clouded price/sales metric. Late in 2021 and more so in 2022, this growth mindset, at last, fell out of favour, quickly collapsing some of the high vaulting valuations in pandemic-darling stocks like Meta, Alphabet, Netflix, and Tesla.

In response to soaring inflation in 2022 founded on Covid-induced supply-chain issues, firm demand in major economies and the fallout from the war in Ukraine, central banks across the world scrambled to lift interest rates from emergency lows to levels that are generally regarded as necessary to reduce the rate of inflation. When interest rates begin to rise, long-duration assets experience the most dramatic falls in prices. This is precisely what we experienced in 2002. Duration is the financial term that measures the sensitivity of an asset’s price to a change in interest rates. In low or falling interest
rate environments, investors want to own assets with long duration, as they tend to rise in price the most as interest rates fall e.g., long-term bonds or the ultimate long-duration growth asset: growth stocks. Conversely, when interest rates do begin to rise aggressively, as in 2022, long-duration assets experience striking falls in value. For example, most bonds pay a fixed coupon (i.e. interest payment) and when rates go up, the only way a fixed coupon can equate to a higher interest rate is if the investor pays less for the bond.

But it is not all doom and gloom, the Australian economy outperformed in 2022. The year ended with trade accounts solidly in surplus, the federal budget broadly balanced; jobless rate at 50-year lows. And while the inflation rate lifted over the year along with wages, other countries are experiencing far hiker spikes in prices.

From a COVID-influenced low base, the Australian economy grew by 5.9% over the year to September, but it is likely to slow over 2023 in response to higher interest rates.

Starting in May, the Reserve Bank (RBA) lifted the cash rate from 0.1% to 3.1%, the most aggressive monetary tightening ever imposed. The Consumer Price Index lifted 7.3% over the year to September 2022.

The past three years have proven to be challenging and no let-up in the short term is expected for Australian investors. Inflation, together with uncertainty about where interest rates will settle is expected to dominate in 2023. High energy prices will persist, the war in Ukraine still rages and the re-opening of the Chinese economy poses risks and opportunities.

It is expected that the average balanced growth superannuation fund (41% – 60% Growth Assets) would have returned -6% pa for the 12 months to 31 December 2022. This followed a positive return of around 9% in the 2021 year. Balanced growth super funds returns have averaged around 3.5% pa over the last five years, above inflation, and bank deposit returns.

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Monthly Market Update October 2023

  • Markets struggled in October as stronger economic data kept central banks hawkish, adding fuel to the “higher for longer” rhetoric.
  • Shocking events in the middle east added to market uncertainty, given the unknown market impact, and implications for energy prices.
  • Australia’s quarterly inflation numbers reinforced what the monthly series had been pointing too – stickier inflation. Prices were up +1.2% q/q in the third quarter, driven by rents higher fuel prices and insurance costs. Annual inflation standing at 5.4% and drifting lower.
  • Reserve Bank of Australia (RBA) left its cash rate unchanged at 4.10%, for four consecutive policy meetings, but no indication that the RBA has completed its rate-hiking cycle.
  • Australia’s job ads were down 3.0% in October, 11.4% lower than in October 2022 – which is expected as businesses tackle elevated inflation and higher costs.
  • Equity markets continued their retracement in October as investors reacted negatively to rising bond yields and geopolitical events.
  • The US recession that was widely predicted has yet to arrive, with Q3 U.S. GDP rising 4.9% amid strong consumer and government spending. However, these drivers could be short-lived as consumer saving rates decline from 5.2% to 3.8%, while facing tighter lending conditions, and higher interest payments.
  • Sovereign bond yields surged throughout the month, as US Treasury yields rose to 5%.
  • Still, US inflation is significantly lower than peak 2022 levels, US economic growth has been resilient, and the S&P 500 remains up +10.7% y-t-d as investors anticipate the Fed could begin the aggressively cut interest rates as soon as the first half of 2024.
  • October’s euro-zone consumer sentiment report was released, the index indicated euro-zone sentiment had deteriorated for a third consecutive month.
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