Hedge Clippings | Friday, 15 July 2022
Australian unemployment at 3.5% - the lowest since 1974. US consumer inflation at 9.1% year on year - the highest since 1981. Chinese GDP growth -2.6% for the quarter. Canadian interest rates up by 1%. A resurgence of COVID, with over 47,000 cases in the last 24 hours, and over 300,000 active cases at a time when half the population of NSW have been staying indoors due to yet more rain.
If all the above seem gloomy statistics, it is probably because they are. With the RBA forecast to tighten further in August, and at least once more later in the year, the property market, and also consumer confidence, are likely to take a battering.
Opinion among the experts remains divided between those who think that inflation - the root cause of the increase in rates - is transitory and will top out relatively quickly, or will move towards an inflationary wages spiral, as it seems to be in the USA. Hedge Clippings is by no means an expert, but our call is that it will top out within the year, but won't return to what we had become accustomed to this time last year. Meanwhile, the damage to the economy from sagging property prices and consumer confidence as a result of increased interest and mortgage rates will be considerable. While the RBA won't actually say that's what they're trying to achieve, it is - but only up to a point. Philip Lowe has a tightrope to walk, and history, and his recent forecasting record, hasn't been that great.
This week Hedge Clippings interviewed Dean Fergie from Cyan Investment Management, and we commented that the past six months - and June in particular - were brutal months, particularly in the small cap sector in which their fund operates. Dean noted performance suffered from liquidity driven price gaps, and was further exaggerated by tax loss selling coming into the end of the financial year. Dean's typical honesty is always refreshing, so it's encouraging to hear his views that many stocks had been oversold towards cash backing, and in some cases had already started their recovery journey. You can watch the video here.
Even though the ASX200 has outperformed US Equities (based on the S&P500) over the six months to the end of June, (-9.93% to -19.96%) and to a lesser degree over 12 months, (-6.47% to -10.62%) and there's been a sea of negative numbers, there is evidence that in many cases, actively managed equity funds have achieved what they set out to do: Outperform in a negative market, or even better, provide a positive return. Based on 75% of the total of 423 equity based funds in the FundMonitors.com database that have reported June returns to date, 36% have outperformed the market, with that figure rising to 65% over 12 months.
The problem is selecting those out-performers, and particularly those that can do so consistently through the economic cycle. Many, if not most, of the Top 20 performers of 12 months ago have, like Icarus, flown too close to the sun. Time will tell if they meet his final fate, or recover to fly once again. Meanwhile, once the remaining funds report their June results, we'll bring you the results of our annual report on Top Performers across various peer groups and strategies.
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