Page 3 - SMA Portfolio_Specialist Growth Assertive 18.11.22

PM Liz Truss decided to shake things up economically with a rather differentiated, ill-timed, and poorly communicated policy agenda which forced the
Bank of England to intervene and stabilise UK government bonds and the currency, as both came under attack.

Japan spent the quarter finally seeing some reasonable inflation for the first time in a very long time, not before their policy framework saw them being
tested by the market as their government bond yields began to rise putting pressure on the central bank to remain committed to their framework
whilst also managing their currency, which has historically been traded as a safe-haven currency along with Swiss Franc. But that was also brought into
question after the Swiss central bank raised interest rates again, bringing an end to the era of negative rates in Europe. Concerns regarding the Yen
and Swiss Franc saw investors further flock into the US dollar.

Asian and emerging markets continued to be driven by two main issues: China’s languishing economic growth due to their continuation with COVID-
zero policies; and significant US dollar strength causing added inflationary pressures for importers, particularly commodity importers. The Chinese
economy faced increasing headwinds, already reeling from a property crash, with a continuation of COVID-zero policies significantly hampering
economic growth with rising unemployment falling industrial production, and not enough government stimulus to right the ship. We did see signs in
the quarter of stimulus from both the government and the central, though relatively minor at this stage given the significance of the issued at hand,
whilst we also saw a significant relaxation of COVID policies in Hong Kong and Macau.

Geopolitically, tensions between China and the USA soared again regarding Taiwan’s sovereignty as the 3rd most powerful US government official flew
into Taiwan as a show of both support and strength, not helping already heightened tensions regarding technology security and global semi-conductor
supply. Chinese and Indian buying of Russian oil and gas also put these countries in the crosshairs of the allies, with both countries taking advantage
of significantly reduced prices and constrained global supply whilst touting the need for their own energy security.

The US economy moved into bi-polar territory in the quarter with current data remaining relatively strong whilst leading indicators turned more and
more negative, putting the central bank between a rock and hard place. This meant an increasing risk of over-shooting, and hence more painful
recession, versus a hopeful soft-landing. The central bank made clear in the quarter that whilst inflation remained high, they would need to continue
hiking rates with added emphasis and rhetoric around higher rates “for longer”. This took the wind out of any hope investors had regarding a pause
and/or a pivot back to policy loosening. However, investors continued to try and read the tea leaves which put them front and centre of the central
bank’s ire multiple times during the quarter.

The US labour market remained strong, and whilst headline inflation started to abate given falling commodity and food prices, core inflation widened
much to the chagrin of the central bank and President Biden’s administration, particularly leading into the Mid-Term elections where it’s looking
increasingly likely that the US will move back to policy stagnation if Democrats lose power in the House. The Biden administration’s election policy
promises didn’t help the inflation dynamic, with fiscal expansion making the central bank’s job even harder. The rapid pace of rate increases versus the
rest of the world saw the US dollar surge, putting pressure externally (i.e. import prices) whilst impacting US company revenues and earnings,
particularly multi-national companies. More to come on this front in the period ahead.

Closer to home, we were once again reminded of our lucky country status, which still holds given the abundance of natural resources under our feet
and our physical proximity (or lack thereof) to the rest of the world. This has meant that we’re approximately 6-8 months behind other parts of the
world from an economic perspective but assisted by a commodities floor and a natural benefit in the falling of the Aussie dollar which makes our
exports that much more competitive. Mixed data was also a feature of the Australian economy in the quarter, with rising business confidence, weak
consumer confidence, and retail sales which increased at a slower pace but remained very healthy versus pre-COVID levels.

Like the USA, our labour market remained strong, with household and corporate balance sheets in excellent shape. However, labour shortages started
to hit home, and property market weakness from the peak has begun, but has yet to feel the full brunt of the 2.50% of rate increases we’ve seen in a
short period of time. Inflation continued to push higher in the quarter forcing the central bank’s hand on outsized rate hikes, whilst the new Albanese
government pushed ahead with their Jobs Summit and climate agenda.

Portfolio update
Portfolio returns for the September quarter were an improvement on the previous quarter but were still negative. The main detractors were
investment selection within equities and the allocation to infrastructure. The main contributors were investment selection within bonds and the
portfolio’s allocation to Australian small companies, whilst being unhedged from a currency perspective also assisted returns given the large fall in the
Australian dollar.

On absolute basis, the best and worst performing investments were as follows:

Top 3:
• Mineral Resources
• Treasury Wine Estates
• ResMed

Bottom 3:
• Domino’s Pizza
• TPG Telecom
• Ampol Limited