Market Commentary

The Australian equity market, in general, fell through the month of April after making significant gains in March. Despite this negative return, the Australian equity market continued to outperform most major global indices (in local currency terms) with the S&P500 off (-8.80%), the Japan Nikkei 225 (-3.50%) and the Europe Stoxx 600 (-2.15%).

The sell-off in global equities has been dominated by market fears of broadening inflation pressures, elevated geopolitical risk and further tightening of monetary conditions by Central Banks. These themes may continue to put downward pressure on economic growth, corporate earnings and equity market valuations in the near term. Locally, in their April meeting, the RBA removed some of the more dovish language in their economic commentary, paving the way for earlier rate hikes than previously signalled. This more hawkish pivot was compounded later in the month as Australian consumers’ price index (CPI) came in at a 20 year high of (+5.10%), well ahead of market expectations. Both of these events drove market expectations for interest rates higher.

With growth fears, inflationary pressure and valuation headwinds dominating, investors rotated into more defensive sectors of the market with Utilities (+9.33%), Consumer Staples (+3.29%) and Industrials (+3.44%), the best performing sectors for the month. The worst performing sectors included Materials (-4.34%) on a weaker Chinese commodity complex and IT (-10.37%), which followed global peers lower on a mixture of higher inflation/interest rates and weaker than expected revenue outcomes. All returns up to this point are presented in local currency terms.

Portfolio Performance

Pleasingly, the Octagon Australian Equities Fund delivered a positive gross return of +0.88% for the month of April, outperforming the fund's benchmark return of -0.11% by +1.00%.

For the 12 months to the end of April 2022 the Australian Equities Fund delivered a gross return of +14.12%, outperforming the fund’s market index return of +11.40% by +2.72%.

Key contributors to outperformance over the month included our overweight positions in fuel retailer, Viva Energy and private healthcare operator Ramsay Healthcare. Viva signalled a recovery in fuel volumes as lockdowns eased and the demand outlook improved, there were also promising signs for refining margins which buoyed the outlook. Ramsay Healthcare soared (+31.03%) after receiving an indicative takeover proposal by a consortium of private equity investors, the offer highlighting our long held view there was latent value in Ramsay’s portfolio of high quality healthcare real estate, with upside from the volume recovery in elective surgeries. Our underweight position in BHP also boosted performance, as fears around harsh lockdowns and slowing Chinese growth saw key commodity prices weaken.

Key detractors from performance included our underweight positions in toll-road operator, Transurban Group, and plastic packaging manufacturer, Amcor. Both benefitted from their relatively defensive characteristics, as investors rotated into lower risk segments of the market.

Outlook

Large moves in interest rate expectations and longer term bond yields over the last few months have been in line with our expectations, showing Australia is not immune to the inflationary pressures being experienced across the globe. Greater risks are emerging for the global economy, with Chinese growth slower than it has been historically and impacted by strict lockdowns. Monetary policy, easy for some time, is now being tightened in many major economies. These factors present some downside risk to global economic growth and many commodity prices may be vulnerable to a correction. A key swing factor to our portfolio positioning remains the outlook for wage inflation, which has the potential to extend the current period of high inflation for longer, and in turn, lead to a higher interest rates than would otherwise be needed. We have positioned the portfolio to take advantage of higher interest rates by adding more exposure to high quality Australian banking franchises, while maintaining limited exposure to the more expensive technology sector which continues its free-fall.

We actively manage the fund’s foreign currency exposures. As at 30 April 2022, these exposures represented 100.85% of the value of the fund. After allowing for foreign currency hedges in place, 66.88% of the value of the fund was unhedged and exposed to foreign currency risk.