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19 Jan 2024 - Hedge Clippings | 19 January 2024

By: FundMonitors.com

    

Hedge Clippings | 19 January 2024

Happy New Year, and Welcome Back to Hedge Clippings' weekly update of news covering the world of actively managed funds, along with the regular review or comment on what we think is happening in the world, be it the economy, politics, or possibly whatever is catching our attention - or should that be getting under our skin?

Traditionally at this stage of the year we reflect on last year's markets and fund returns, and then try to peer forward through the mist to consider what might lie ahead. Looking back is always the easy part. Even though rarely does anything momentous ever happen "out of the blue", whether in financial markets or geo-politics, let's get the easy part done first:

Equity markets performed well thanks to a stellar last quarter - or more correctly, the last two months of the year: At the end of October, the S&P500 Total Return was up 10% YTD, but closed the year up over 25%. The ASX200 Total Return was fractionally negative at the end of October, but managed to recover to finish the year up 12.42%. Behind this of course was the global focus on inflation, and in turn interest rates, with signs that the tightening cycle which had started in May 2022 might have come to an end, with a potential easing sometime in 2024.

As is normal in negative and volatile markets, the small and mid cap sector bore the brunt of the bad news, with limited liquidity in many stocks outside the Top 300 taking its toll on many of the funds focusing on that sector. The damage wasn't universal however, with 20 out of the 89 funds making up the Small/Mid Cap Peer Group outperforming the ASX200 T/R's performance, and four, HyperionLakehouseSpheria and Bennelong's small cap offerings doubling the index's 12 month return, resulting in the Peer Group's 12 month average return coming in at 8.97%.

To be fair, the small/mid cap sector had some ground to make up: In 2022 only 7 small cap funds posted a positive year, 6 of them only just, but the 7th, Altor's Emerging PIPE Fund was the complete outlier with a positive return of 62.2%.

Overall, across all strategies and Peer Groups, the "sea of red" which characterised our performance tables in 2022 was replaced with black in 2023. Only two strategies - Equity Buy/Write and Market Neutral - were negative in 2023, with every Peer Group ending in positive territory for the year, let by Digital Assets (+87.86%) coming back into favour, although yet to erase the Bitcoin rout of 2022.

From an activity perspective, and based on anecdotal evidence from AFM's OLIVIA123 Application Portal, the volatility in the early part of last year resulted in relatively subdued flows into equity, and particularly the small cap equity sector. This was more than offset by significant interest in and flows into Private Equity, Debt, Credit, and the emerging Hybrid Credit asset class, with the average investment per application up over 50% to just shy of $150,000 each, as wholesale and HNW investors sought relative security away from the volatility of equity markets, preferring monthly or quarterly distributions of up to 10% or more p.a., often exceeding the benchmark of RBA's cash rate +5%.

All these details and more can be accessed on the FundMonitors.com website, including for those yet to take advantage of the current 45 Day Free Trial.

Now the difficult part - what's ahead?

For obvious reasons of self-preservation we'll keep this vague. In our experience many of the economic experts are only correct in hindsight, with many of their (and our) incorrect predictions conveniently excused or forgotten. Given that, what hope has Hedge Clippings got? However, here goes:

Australia: No recession, continued low unemployment (sub 5%), and a gradual easing of inflation and thus interest rates in the 2nd half. Caveat - energy prices on the back of further turmoil in the middle east, potentially spreading.

China: Economic troubles persist, as will property malaise. However growth of 5.2% in 2023 isn't too shabby, assuming you can believe the numbers. Taiwan rhetoric to continue. No action (yet, but watch this space).

Japan: Re-awakening!

Ukraine: Winter grinds on! Wait till Spring, with the risk that the West grows tired before Putin does. The Ukranians will never surrender.

Israel/Gaza/Palestine: Best avoided - both physically and commentary!

UK: Long term decline continues.

USA: Resilient economy, inflation and interest rates to decline (slowly).

Finally, 2024 is election year in the US. How a nation that put a man on the moon, was and is possibly still the leader of the free world, and with a population of over 330 million (vs. Russia at 143 million, give or take casualties from the Western front) can only seem to provide the choice of President between an egotistical liar battling multiple court cases, and an octogenarian who at best stumbles and struggles, is amazing!

Neither would make it past first base in Australia, but then we doubt Albo or Peter Dutton would make it in America.

Either way, if not sick of it/him already, get used to Donald Trump being front and centre of the news for the next 12 months.

All in all, why wouldn't you want to live in Australia?


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