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Quarterly Newsletter: Reflecting on the First Quarter of 2023

Writer's picture: Max AlphaMax Alpha

Updated: Jul 31, 2023

We had started this year with a base case that each of the world’s three key economic regions (US, EU, and China) will be driven by idiosyncratic factors. There have been surprises since our previous comments. In general, investment markets performed better than we expected and shaped an expectation that we have seen a peak in inflation and hopes of a soft landing in the US that would deliver relief to the global economy.


Our observations of the “why” include:

  • Peak inflation and the expectation that the central banks would change their stance on upward rate adjustments (at least pausing),

  • An increase in liquidity brought about by the China re-opening, and

  • The raising of the US deficit ceiling which would require the Treasury to use the balance in the General Treasury Account.


Whichever you subscribe to, there was an increase in liquidity and sentiment.


Additionally,

European markets have improved, and a mild winter aided the adjustment to a non- Russian energy future,
The China re-opening demonstrated a fast relaxation of restrictions. And while this had a, maybe surprisingly, negligible impact on the oil price, copper was a beneficiary.

Together these brought a positive start to 2023, which, if enduring, could invalidate our base case of persistent inflation and higher interest rates. Our outlook is that the future investment horizon is different to the pre-2019 world. We will move from economic expansion driven by credit into a period of adjustment where there will be a fundamental impact to industry, and therefore asset prices.


In the European context, news would focus on Ukraine, and how the China re-opening has benefited European markets. For us, this underlines that governments are an important (if not the key) factor which places energy security high on the agenda. These changes are affected through capital and therefore impact capital markets.


The US can be understood through the price of capital, therefore rates, liquidity, and how the bond market anticipates the future decision. There are two axioms in the market:

  1. The market is always right, and

  2. Don’t fight the Fed.


The market expects at least a pause in rate hikes, but the actions and language of the Fed say different! In this case who do we believe?


Quarter one is over. “Investors will learn the importance of liquidity”, which is never truer as we watch the emergence of the liquidity issue for US regional banks (aka SVB and Signature). We have reviewed our portfolio exposures, as well as counterparties and we have no exposure to the US or European Banking sector. We have de-risked our portfolios and are focused on the mega-trends, which we believe will be appropriate for an environment where:


  • Inflation is persistent.

  • Liquidity is declining.

  • Interest rates are elevated.

  • Growth will be lower and

  • Volatility remains higher.


 

Max Alpha Opportunities Fund Update


Energy Transition Strategy

The Max Alpha Energy Transition Strategy (ETS) returned 5.2% year to date, outperforming global energy transition indices such as the S&P Global Clean Energy Index which lost 1.95% over the same period (total return in AUD). The key performance driver for the ETS was Gold (+4.9% yd.), which experienced a surge in the second week of March. The ETS’ performance was further helped by an appreciation of EU Carbon Allowances, rising from 81.49 EUR at the beginning for the year to 86.60 EUR as of March 15 (+6.3% yd.). The fact that EU Carbon Allowances had reached a high of 97.28 EUR in February underscores the volatility of this commodity*.


Low Carbon Dividend Strategy

Year to date, the Max Alpha Low Carbon Dividend Strategy advanced 7.7%. This compares favourably against the S&P/ASX Dividend Opportunities Total Return Index and the broad Australian benchmark S&P/ASX 300 Total Return Index which gained 4.25% and 1.74%, respectively. The strategy’s good performance is primarily based on dividend income, but also on positive capital appreciation. As of March 15, eighteen out of twenty companies in the strategy went ex-dividend, with the average dividend yield being approximately 5.4%. *


Opportunities Fund Class A

The Max Alpha Opportunities Fund Class A continued to pay a steady, fixed interest of 7.5% p.a. net of fees. Making headlines, the RBA Target Cash rate increased from 3.1% at the beginning of the year to 3.6% in March. Meanwhile yields for longer-dated government bonds have declined. This led to an inversion of the AUD yield curve, with shorter maturity bonds paying higher yields than longer-dated bonds. As a yield reference for a five-year maturity, an Australian government bond yields 3.3%, while a non-financial BBB rated bond yields 5.8% (as of 28 February, source RBA).*

*All data as of 15 March 2023 unless stated otherwise.


DISCLAIMER:

Max Alpha is a trading name of Max Alpha Asset Management Pty Ltd (ACN 143 550 538, AFSL No. 362215). Max Alpha Fund Management Pty Ltd (ACN 640 045 405) is a Corporate Authorised Representative (CAR No. 001286191) of Max Alpha Asset Management Pty Ltd.


The information on this document is intended for Wholesale Investors located within Australia. The distribution of this document in jurisdictions outside Australia may be restricted by law and persons who come into possession of it should seek advice on and observe any such restrictions. Before acquiring our services and/or any products recommended by us, you must confirm your status as an Australian Wholesale Investor as defined by section 761G of the Corporations Act 2001

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