Despite the portfolio being underweight some of the larger contributors to the absolute index return (CommBank, BHP, Fortescue, Afterpay, CSL) during the month, the portfolio benefitted from a number of significant profit upgrades in overweight positions including NIB holdings, Bluescope Steel, Mirvac, PSC Limited, Westpac and a favourable asset sale at IGO Limited.
Much of the recent market commentary centres on whether inflation will return. While it is yet to be seen whether the record commodity prices that are occurring in both hard and soft commodities and higher shipping rates make their way into Producer Pricing Indexes and then into Consumer Price Indexes it can be said that there is no natural impediment for long bond rates to moderate. It is our view that while central banks continue to sit on the sidelines waiting for inflation data to pick up, long bond rates will continue to be stable at current levels or rise as the market makes the required adjustments as economic activity returns and ahead of official rate rises.
Conversely it is also our view that should central banks start to raise rates this will lead to long bond rates falling as the market will expect that this will stall any recovery. Interestingly the huge miss on the April 2021 expected job numbers in the USA (266k vs 1m expected) barely lead to any drop in ten year bond yields, indicating the market expects economic activity to continue to be higher despite short term fluctuations.
Full report attached
