Market Wrap November 2022

Posted in Wealth
07/12/2022 Level One


Local: The ASX200 index rose 5.6% over November, as investors responded to a more dovish than expected RBA 25 bps hike in the cash rate to 2.85%.

Global: The S&P 500 gained 6.6% in November after a disappointing start to the quarter.

Gold: Spot price for Gold rose strongly by US $114 to US $1,754, as speculation the Federal Reserve is closer to the end of the hiking cycle supported investor interest, driving prices higher.

Iron Ore: Iron Ore prices gained US $21 to US $102/Mt on the news of government support for the Chinese property market and reopening expectations from the easing in the zero COVID policy.

Oil: Brent Oil prices fell US $9 to US $85/bbl amid speculation a production cut at the next OPEC meeting is unlikely.



Housing: CoreLogic’s national Home Value Index (HVI) moved through a seventh month of decline in November, down -1.0% over the month to be -7.0%, or approximately -$53,400, below the peak value recorded in April 2022.

The decline comes after national housing values surged 28.6% higher through the recent upswing, adding roughly $170,700 to the value of the average dwelling.

Although values are continuing to trend lower, the rate of decline has been consistently moderating since the national index dropped by -1.6% in August.

CoreLogic’s research director, Tim Lawless, said the easing in the rate of decline is mostly emanating from the Sydney and Melbourne markets, but is also evident across many of the smaller capitals and most regional markets.

“Three months ago, Sydney housing values were falling at the monthly rate of -2.3%. That has now reduced by a full percentage point to a decline of -1.3% in November. In July, Melbourne home values were down -1.5% over the month, with the monthly decline almost halving last month to -0.8%.”



Interest Rates: The RBA Cash rate has now had 8 consecutive rate rises. A rise of 0.25% at the start of December has pushed the cash rate to 3.1%.

Retail Sales: Australian retail turnover fell 0.2 per cent in October 2022. This is the first monthly fall of the year in Retail Trade, following a 0.6 per cent rise in both August and September 2022. The October fall in retail turnover ends a run of nine straight monthly rises and suggests increased cost of living pressures including interest rate rises are starting to weigh more heavily on consumer spending.

Bond Yields: The Australian government 10-year bond moved down this month by 23 bps to 3.53%. U.S yields also lost ground off the back of Norman Powell`s comments signaling the Fed could be less hawkish than previously predicted, as U.S 10-year bonds fell by 38 bps to 3.70%.

Exchange Rate: The Aussie dollar rose over November against the American dollar, to finish the month at $0.670 and fell against the Euro at $0.647.

Inflation: The October monthly CPI indicator rose just 0.2% on the previous month, slowing to 6.9% over the year. A fall from 7.3% previously.

Consumer Confidence: The Westpac Melbourne Institute Consumer Sentiment Index fell by 6.9%, from 83.7 in October to 78.0 in November. Sentiment continues to plumb historic lows. This print of 78.0 is now below the low point of the GFC (79.0) and only slightly higher than when the COVID pandemic first hit in April 2020 (75.6). Prior to that, we need to go back to the deep recession in the early 1990s to find a weaker read. The latest sentiment decline follows ABS figures showing inflation surged from 6.1% in June to 7.3% in September, with official forecasts for inflation to go even higher by the end of 2022 and to remain relatively high through 2023.

Employment: The seasonally adjusted unemployment rate fell 0.1 percentage point to 3.4% in October 2022, seasonally adjusted employment increased by 32,000 people (0.2%) in October 2022. Given the size of this increase, the employment to population ratio increased 0.1 percentage point to 64.3%.

US Employment: Total nonfarm payroll employment increased by 263,000 in November, and the unemployment rate was unchanged at 3.7%. Notable job gains occurred in leisure and hospitality, health care, and government. Employment declined in retail trade, transportation, and warehousing.

GDP: GDP is expected to slow to under 1.0% over the next 1-2 years. This includes some very soft quarterly growth in the back end of 2023 and is well below trend growth of around 2.25-2.5%.

Purchasing Managers Index: The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI®) fell 4.9 points to 44.7 in November, indicating deteriorating conditions (readings below 50 points indicate contraction in activity, with lower results indicating a faster rate of contraction). This is the first month of contraction following three months of flat conditions.

Sources: ABS, AFR, AWE, BLS, CoreLogic, Macquarie MWM Research, RBA, TradingEconomics, UBS



Australian Economic Outlook

Falling retail values could put a welcome dint in the consumer boom

Retail sale values in October were weaker than originally expected, falling 0.2% from the previous month. This is the first negative reading since COVID-impacted 2021. It must be noted that non-seasonally adjusted data still lifted 3.6% on the previous month but increases are diminishing. The average monthly increase has slowed to 0.3% from 0.7% previously. Meanwhile the yearly change dropped to 12.5% from 17.9%. However, this level is still up a significant 26% since Feb-2020.

Inflation: Food remaining resilient, but non-food categories are starting to lag behind

By industry, food remained resilient with a 0.4% improvement on the month before and a 5.2% increase over the past 12 months. However, every other category retracted, with non-food down -0.6% on the previous month but in contrast remains up 17.7% on the year.

RBA`s Phil Lowe warns if wages compensate for inflation, “it will be painful”

The RBA`s Governor Phillip Lowe recently outlined his view of a wage-price spiral. “The issue that many central banks have been worried about including the RBA, is high inflation. This may lead the workforce to say, ‘well inflation is 7%, I should be compensated for that in my wages`. It is hard for people to understand that wages don’t rise with inflation. The alternative though will be more difficult for your everyday person. If we all bought into the idea that wages must go up with inflation, we could be in trouble. So best to avoid that situation”.

Government to push industrial relation changes to “get wages moving”

In Q3-22, the average wage increase for the private sector was already at a healthy 4.3%, the largest on record in the wage price index data. Meanwhile, the RBA`s November meeting minutes noted “an upside risk to inflation outlook over the medium term was the possibility that price, and wage-setting behaviour would shift, resulting in domestic inflationary pressures becoming more persistent.” Importantly, the Government announced that they will pass industrial relation changes to “get wages moving.” With the RBA signalling a desire to pause, we continue to expect an additional 25bps hike, to a peak of 3.35%, We will still see a 25bps increase in December, but will now be looking at another 25bps increase in Feb 2023. UBS has a very dovish outlook on global inflation views. Collapsing to 2% next year for G7 countries; and the US Fed slashing interest rates to 1.25% by Q1-2024. Conditionally on this view, we still expect the RBA to ease in 2023. However, the peak could last for longer, around 9 months, 3 month longer than the previous estimate. This pushes out the first rate decrease to Q4-2023. Overall, there is upside risk to forecasts for wages, inflation and unemployment. As well as downside risks to real GDP and house prices. These are constantly under review with the volatile environment.

Sources: Australian Financial Review, UBS


Partners Group mulls mid-2023 exit for Guardian Childcare

Many of our clients currently hold investments in the Partners Group Global Value Fund. The article below from the Australian Financial Review, demonstrates the type of investments held in the fund.

Private markets investor Partners Group has put its Australian childcare business Guardian Childcare and Education in next year’s M&A pipeline, with expectations brewing of a potential $1 billion exit.

It is understood Partners Group has started readying Guardian Childcare for sale and has hit the market for advisers to be involved in the potential sale.

Sources said Partners Group had gone to a small handful of investment banks in recent weeks, asking them to pitch potential deal structures, buyers and valuations in an effort to win the sell-side mandate.

Bankers are expected to pitch Guardian Childcare as a COVID-reopening play, with occupancy rebounding to more than 80 per cent this year and likely to go further as more parents get their kids back into early education.

The business was said to be making $80 million to $100 million EBITDA a year. Sector heavyweight G8 Education, which has been listed since 2007, was trading at 7-times forecast EBITDA and 17-times historical earnings on Tuesday.

Partners Group’s Cyrus Driver, a managing director based in Singapore, is on Guardian Childcare’s board and is overseeing the process, sources said. The firm’s expected to appoint an adviser early in the new year and, if business conditions and funding markets are suitable, it could be up for auction by the middle of the year.

Partners Group bought what was then called Guardian Early Learning in 2016, paying $440 million to pan-Asian buyout firm Navis Capital. The company was formerly owned by Australia’s Wolseley Private Equity.

Guardian Childcare is understood to have grown to more than 100 centres nationally under Partners Group’s ownership, with most of its sites in major capital cities Brisbane, Sydney, Canberra, Melbourne and Adelaide.

Inbound Interest

The company’s expected to attract interest from rival private equity firms, as well as strategic players. Ontario Teachers’ Pension Plan-backed Busy Bees has been the big buyer in Australian and New Zealand childcare in the past two years, while it’s been a rich hunting group for private equity (PE) in the past.

Sources said Partners Group had already seen inbound interest in the business, likely from PE firms realising the owner will be thinking about an exit after a six-year hold period.

As for the investment bank bake off, it’s expected to be hotly contested. It’s the time of year when managing directors inside the investment banks have to put together 2023 pipelines, and a $1 billion-odd Guardian Childcare mandate would be a good way to start the new year.

Source: Australian Financial Review

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