Page 10 - Client Review Report Redacted

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How quickly fortunes (sentiment) can change, particularly in the post-covid period, with the middle
of the quarter painting a completely different picture. Real signs of economic weakness suddenly
appeared with Australian retail sales going from bad to worse, a pretty significant drop-off in US new
jobs data (which has been spurious at best during and in the post-covid period), weaker consumer
sentiment & confidence, and Chinese economic data which disappointed and in some cases
appeared to be re-weakening again. This is when we saw those fleeting glimpses that bad economic
news was bad for markets. We know that sounds somewhat simple and logical, but markets have
largely been operating on the basis that bad news was good for markets under the guise that their
saviour (central bankers with their money printers) would swoop in and save the day. That dynamic
prevailed effectively since the GFC where inflation remained tame and actually under-shot versus
central bank targets but doesn’t work so well coming off inflation peaks of 8/9% and where falling
inflation had begun to stall. How old we feel reminiscing rational and logical markets!

To top it off, Australian inflation significantly disappointed, with the monthly indicator actually ticking
up, confirming concerns that the March quarter print wasn’t an anomaly. There were even calls for
both the US and Australian central banks, particularly the latter, to consider further rate hikes, with
pressure on keeping a lid on the inflation genie.
A fairly swift pivot in sentiment and rhetoric in the weeks that followed with US inflation meeting
expectations (i.e. no upside surprises), US jobs data showing further signs of weakening, and the
first interest rate cuts in developed economies (Canada, Europe), with the US Federal Reserve also
flagging their expectations for just one rate cut this year but with some dovish undertones (the all-
important central bank wordsmithing). As markets do these days, investors took this as a sign to
one-up the US Fed with market expectations implying two US rate cuts for the year, with the first
likely in September. Also, an interesting read-through on the Canadian and European central bank
rate cuts, with the former trying to stave off recession in the Canadian economy whilst the latter
seemed to be front-running concerns of a European economic drop-off in the period ahead with
inflation within target.
Adding to the merry-go-round period described above, investors took proper notice of rising political
and geopolitical risks. On the political front, we had UK elections which went as expected (i.e.
landslide win for Labour), a shock snap election called by French President Macron following very
poor showing for the left-wing parties in the European parliamentary elections, and Indian Prime
Minister Modi winning another term but with a smaller majority meaning passage of his pro-business
policy remit might be harder ahead. The French elections require some explaining in that the “far-
right” party won the first round, but then lost the important second round to the “far left” party following
deal-making between this party and President Macron’s “centre-left” party to ensure he remained in
power. Markets clearly didn’t like the first-round results but seem to revel on the news of a likely
hung parliament. We also had new flashpoints on the two-wars front, both US and Europe levying
further tariffs on Chinese goods, former President Trump convicted on charges and awaiting
sentencing, plenty of foreign diplomacy with US visiting China / China visiting Europe / China visiting
Australia, and a farcical US presidential debate (as they go of late) with President Biden’s health
now a key outcome rolling into the November elections.
Other considerations in the quarter included some instability in currency markets with the Japanese
Yen in freefall, though the Australian dollar did push higher against the US dollar (impacting
unhedged global asset exposures) but not against other currencies. We also had the Australian
Federal Budget, with little to no surprises, but the front-ending of their spending program along with
well flagged revised tax cuts didn’t help the RBA’s cause.
In summary, a very narrow number of winners in the quarter. Highlights included Chinese equities
assisting broader Asian / emerging markets, UK equities within a weak European equity backdrop,
US technology trouncing broader US equities, small companies underperforming large companies
on weaker economic concerns, and property/infrastructure and bonds hit by rising bond yields (falling
prices) as rate cut expectations were pushed out.

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