Market Data November 2023
Market Commentary
November witnessed a robust performance in the S&P 500 and Nasdaq Composite, with gains of 8.9% and 10.7%, respectively. Growth stocks outshone value stocks, driven by Information Technology and Consumer Discretionary sectors, while rate-sensitive 'value' sectors like Real Estate and Financials also rallied.This turnaround came after a lacklustre October characterized by rising interest rates and lingering recession concerns, hinting at a dreaded 'stagflationary' scenario.
The past month saw modestly easing long-term rate expectations due to global inflation data and dovish commentary from some Fed officials. Debates raged over whether this coincided with increased economic optimism, with polarized views ranging from a hard landing to a Goldilocks slowdown. Speculation suggested that improving financial liquidity conditions contributed, possibly avoiding a liquidity crunch as seen in December 2018.
Corporate bonds outperformed government bonds, indicating diminishing recession fears as credit spreads tightened. The Bloomberg Barclays Global Aggregate Corporate index returned 4.4% compared to the Global Treasury index's 2.8% in November. Equity markets and long-term rates returned to their September levels.
In Australia,November's inflation data offered some encouragement, though the new monthly series was met with scepticism. Economic sentiment grappled with ongoinginflationary pressures, labour shortages, and a cost-of-living crisis, withhousing and rising mortgage rates at the forefront. The Australian sharemarket,
measured by the S&P;/ASX 300, surged 5.1%, led by healthcare,information technology, and real estate. Key contributors included CSL,Commonwealth Bank, and BHP.
Market Returns - 1 Month to 31 November 2023 (in AUD)
Australian Equities
Global equities rallied in November buoyed by evidence that global inflation was finally moderating to a level that would allow the US Federal Reserve to consider not only to stop raising interest rates, but ultimately look to cut rates in 2024.
The prospect that central banks have successfully tamed inflation without triggering a recession provided renewed optimism for risk assets. Bond yields also rallied sharply, after peaking at nearly 5% in October, subsequently to fall to around 4.50% by the end of November, much to the relief of equities markets.
Undoubtedly, the combination of decelerating inflation and an economy that continues to show a level of resilience has provided a strong foundation for stock market valuations to rebound.
With this backdrop, the ASX 200 rose 5%in November, its largest monthly gain since January 2023.
At a portfolio level Health Care(+11.8%) and Real Estate (+10.8%) were the strongest performing sectors, whileEnergy (-7.3) and Utilities (-6.0%) were the worst performing sectors.Specifically, CSL, Goodman Group, and Cleanaway Waste Management were notable strong performers. Whereas Santos, Woodside Energy, and Treasury Wine Estate weighed on performance.
In November we increased our exposure to commodities that are essential to the global energy transition.
We initiated a position in PilbaraMinerals, which is the largest hard-rock lithium mine in Australia and contributes 8% of global lithium supply. While the lithium market has endured a bear market in 2023 with prices falling ~75% on softening demand and growing global lithium supply, the medium-term fundamentals remain attractive supported by extensive government legislation on CO2 targets.
With the energy sector falling sharply for two consecutive months, we added to our existing positions in Santos andWoodside Energy. Both stocks are trading on an attractive dividend yields +4.5%and a Price to Earnings Ratio below their 5-year averages, at a time when the risks to energy supply either by regulatory and/or geo-political tensions remain elevated.
The immediate risk for inflation and interest rates has eased over the last month, heralding in a level of cautious optimism by equity investors. Nevertheless, the pathway forward will require careful navigation, particularly if inflation remains stubborn ensuring that interest rates stay higher for longer. We are already seeing clear evidence that the higher interest rate environment is progressively weighing on company earnings.
Hence, a vigilance on earnings resilience and balance sheet strength continues to be an essential attribute to portfolio construction.
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Defensive Income
After several months of duration damage causing weak bond returns both on and offshore, yields tumbled in the US as economic data weakened and the FOMC’s language made a dovish turn – combining to send bond prices rocketing. The US10-year yield peaked at ~5.00% on 19 October and closed November at 4.37%. This trend has continued into December with the yield at 4.12% most recently(6-Dec). This mammoth move saw the Bloomberg Global Aggregate (LEGATRUU) Index return 5.04% over the month of November while the AusBond Composite (BACM0)Index put on 2.97%. This is the second-best monthly return on record for the Global Agg going back to 1990 – but the AusBond Comp’s was only the 13th best month on record. Credit also performed well with the AusBond Credit FRN (BAFRN0)Index producing +0.45%.
Continuing with the broad positivity, BondAdviser’s All AUD AT1 and Tier 2Indices both had strong months with Tier 2 outperforming AT1. The T2 Index returned 1.62% for November while the AT1 Index produced +0.76%. The PrimeAustralian Defensive Income Portfolio’s +1.17% return in November was long overdue after months of relatively neutral absolute performance amid weak bond markets. The Bloomberg Bank Bill Index rose by 35bps over the month. Prime is ahead of the benchmark as well as the AusBond Composite and Credit Indices at all tenors in Figure 2 except the 2-year.
November was a very strong month for the Portfolio, with such a high return not seen since 2020 and only having occurred six times prior to 2020. 71 basis points of the result was driven by the Fund’s three duration-heavy holdings which constitute just 21.9% of the portfolio’s allocations. The PIMCO GlobalBond Fund, Yarra Australian Bond Fund, and Pendal Government Bond Fund each produced HPRs of 3.2-3.4%. These resulted in weighted contibutions of a whopping +40, +16, and +15 basis points, respectively. The only detractors from the result were -2bps and -1bps from the Yarra Higher Income Fund and Ardea Real Outcome Fund. Exposure to MAPIF was increased by 0.5%, while 2.5% was trimmed from the Yarra Australian Bond Fund and added to the Pendal Government Bond Fund. The complete sell down of WBCPJ from favourably elevated levels ($104.49at 30 November close) has begun and was 53% complete as at 4 December.
International Equities
- The portfolio returned +4.5% in November
- The portfolio's allocation to global equities drove most of the strong returns, as investors grew increasingly optimistic that inflation had peaked and the Fed was nearing the end of its rate hiking cycle. Growth stocks rebounded accordingly after a difficult October.
- The HyperionGlobal Growth Companies Fund (+11.7%) and Nanuk New World Fund (+8.0%) were the best performing funds, boosted by their exposure to high growth tech stocks like Microsoft and Oracle. The Trinetra Emerging Markets Growth Trust (+2.5%)was more muted but still outperformed the emerging markets at large.
- The portfolio's allocation to global small caps via the Langdon Global Smaller Companies Fund (+5.5%) also contributed positively to performance.
- The only slight drag came from the Platinum International Fund(+0.7%) which maintains a defensive value stance and struggled as investors piled back into growth stocks. However, this contrarian positioning provides some protection in case of a market reversal.
If you would like further details on Prime’s Separately Managed Accounts (SMA), please contact your friendly adviser or our client services team via e-mail at clientservices@primefinancial.com.au
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