The heat is on
16 August 2022
The heat has been on central banks around the world trying to keep inflation under control. We have seen three consecutive rate rises by the RBA, the most numerous since 2010. Similar monetary policy tightening has been seen in other jurisdictions, notably the US where the last inflation figure was 8.6%. Central banks are walking a tightrope as they try to manage inflation while at the same time trying to avoid a material economic slowdown.
One of the challenges is that many of the inflationary pressures we have observed have been driven by supply side issues caused by the pandemic. This has been coupled with the war in Ukraine which together have driven up the price of everything from building materials to food and energy costs.
There are some initial signs, however, that the heat may be coming off some of the areas that have been driving inflation. Globally, there is evidence of weaker demand in weaker Purchasing Managers’ Index (PMI) figures, opening up some spare capacity and allowing supply conditions to improve.
Other signs of the heat coming out of the economy are emerging. The most visible and arguably high-profile, given many of us have exposure, is the housing sector. The Australian housing market is showing signs of softening with auction clearance rates at two-year lows according to CoreLogic data. Sydney has recorded the sharpest fall in house prices, falling by 1.6% in June. We have also seen a string of construction companies go into liquidation, the most recent being Langford Jones Homes in Victoria.
Market Developments During July 2022 included:
Australian Equities
The Australian share market finished July with the S&P/ASX 200 rebounding sharply by 5.75% and ten out of eleven sectors finishing higher. The Information Technology (+15.23%) and Property (+11.93%) sectors led the rebound for the month. Meanwhile, the only negative finisher for the month was the Materials (-0.67%) sector.
Throughout the month, market participants continued to evaluate worldwide central bank monetary policy and the release of economic data as the broader market enjoyed a ‘relief rally’. The Information Technology and Property sector rallied as investors rotated into previously out of favour sectors with large year-to-date losses. The Materials sector was a noteworthy underperformer as worldwide recessionary fears continued to intensify given the continuing geopolitical and macroeconomic uncertainty.
Global Equities
Worldwide risk assets saw a positive return for the first time since December last year over the month of July, albeit with recession fears becoming a reality in the US. Developed markets steeply increased by 6.4%, with Global small caps outperforming their large cap counterparts producing an 8.0% return by month end. Emerging and Asian markets did not fare as well as their Developed market peers, returning -1.7% and -0.6% respectively. As economic data continues to indicate a slowing global economy and inflation rises persist, July's respite was primarily driven by markets pricing in potential interest rate cuts by central banks in 2023.
Fixed Interest
Building inflation concerns, recession fears and interest rate hikes have dominated and influenced global fixed income markets throughout July. The 10-year global bond yields declined sharply in July due to softening economic data. A broad relief rally in global bonds reversed some of the YTD underperformance. Australian 2 Year Bonds remained relatively stable, rising by only 7bps, while Australian 10 Year Bonds steadily dropped by 60bps throughout the month. With the decline in bond yields and narrowing of credit spreads, the Bloomberg Ausbond Composite Index gained 3.36% in July.
Globally, the story is much the same as markets increase expectations for future Federal Reserve rate hikes. Inflation in the US has now accelerated to 9.1%, the highest since 1981. Following the 26-27 July meeting, the Federal Reserve increased interest rates by 75bps, bringing the annual rate to 2.25%. Over the course of July, US 90 Day T- Bills rose by 69bps while US 10 Year Bonds dropped 37bps. July provided some relief to global bonds, with the Bloomberg Barclays Global Aggregate Index (AUD hedged) returning 2.49% during the month.
Persistent inflation pressures, supply chain problems and tightening monetary policy will continue
affecting local and global fixed income markets for some time.
REITs Listed Property Securities
July experienced a considerable turnaround in performance for both the local A-REIT market and the broader Global real estate equities market with the S&P/ASX 200 A-REIT Index (AUD) and the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged) advancing 11.9% and 7.7% month on month, respectively.
Globally REITs have been bolstered by a strong second-quarter earnings season and investors having largely priced in the effects of the Fed’s monetary policy. The Australian residential property market experienced a –1.4% change month on month represented by Core Logic’s five capital city aggregate. Sydney (-2.2%), Melbourne (-1.5%) and Brisbane (-0.9%) were the worst performers. Adelaide continues to show strength (+0.4%) moving to +24% YoY with Perth (+0.2%) staying relatively neutral.
Hold the Line
21 July 2022
Market volatility has persisted as markets are continuously adjusting for the impact of inflation and the subsequent effect on interest rates and economic growth. We believe that this market volatility will persist until there is evidence that inflation has peaked and bond yields have stabilised.
With interest rates rising, there has been increased attention on the risk of recession. The risk of recession has increased as central banks tread the fine line between trying to curb inflation and trying not to strangle economic growth. To date, economic growth remains positive, but some of the cyclical indicators are softening, indicating that the global economy is slowing.
The main issue for the central banks is that monetary policy is a very blunt tool and while raising rates will most certainly curb demand, it will do little to address the supply side issues global economies are facing. A good example is China, where the hard stance on Covid lockdowns have essentially brought Chinese ports to a standstill. Additionally, the war in Ukraine has driven commodity prices up including crude oil and agricultural products such as wheat, fertilizer and canola oil. Ukraine and Russia combined contribute 12% of the world’s total calories and are key suppliers of grains to Africa and the middle east.
Therefore, whether we head into a recession will be dependent on the two key factors of easing of supply chain issues and central banks not overplaying their cards by raising rates too high. At this stage, our base case for Australia is that we will avoid a recession and if we do go into recession, it will not be a deep recession.
Market Developments during June 2022
Australian Equities
The Australian share market closed out the financial year with the S&P/ASX 200 falling sharply by -8.8% and ten out of eleven sectors finishing lower. The Consumer Staples sector was the only positive finisher for the month (+0.2%). The Materials (-12.4%) and Financials ex-Property (-11.8%) sectors were the biggest laggards as recessionary fears weighed down risk assets across various sectors. Similarly, the Information Technology (-11.0%) sector’s poor year-to-date performance persisted.
The Consumer Discretionary sector finished lower as retail sales figures continued to surprise to the upside despite the increasing interest rate environment and pressure on consumers discretionary income. The accelerating sell-off in the Materials sector was driven by market participants weighing up the potential for recessionary risks given the tightening interest rate cycle and continued inflationary pressures. Likewise, similar sentiment around potentially subdued economic growth drove a sell-off in the Financials sector. Overall, the downtrend equities persisted as investors mulled various negative economic headwinds and continued hawkishness from central banks.
Global Equities
The first half of the year concluded with another challenging month in June as inflation and recession fears continue to erode investor risk sentiment worldwide. Developed markets sharply fell by -4.6% by month end, Global small caps followed the lead of their large cap counterparts closing with a more pronounced -6.1% decline. Emerging and Asian markets performed somewhat better than their developed market peers, but nonetheless still fell by -2.6% and -1.8% by month end.
As recession fears heighten and inflation pressure heats up around the globe, central banks continue to be challenged by their now delicate mandate of interest rate settings.
Fixed Interest
Australian Fixed Income markets have delivered another month of poor returns in June, as the Reserve Bank of Australia continues to tighten monetary policy, raising the cash rate by 50bps in both their June and July meetings to a total of 1.35% at present. Despite this, yields remained fairly stable at the short end of the curve with such increases having already been priced in, however yields continued to increase at the 10-year level by approximately 18bps, resulting in a steepening of the yield curve.
Internationally the story remains similar, as central banks continue raising rates in an effort to contain inflation. This can be seen in the US Federal Reserve, which raised the federal funds rate by 75bps in its June meeting, the first hike of such a magnitude since 1994. However, fears of a recession have seen yields fall further out on the yield curve. Overall performance in global Fixed Income markets has been weak throughout June, as the rate increases at the short end of the curve have been more impactful.
REITs (listed property securities)
Local and Global REITs continued to sell off during June. Domestically the A-REIT index (represented by the S&P/ASX 200 A-REIT Accumulation Index) ended the month –10.3% lower, providing the worst monthly performance since March of 2020.
The index has returned –23.5% on a total return basis YTD to 30 June. Global REITS slightly outperformed the local REIT index, albeit still experiencing a significant drawdown of –7.6% during the month. Despite poor performance, globally the all Equity REITs index (-6.4%) remains ahead of the Total Stock Market Index (-10.7%) since the Russia and Ukraine conflict. Domestically, infrastructure (represented by the S&P/ASX Infrastructure Index) has turned negative this month, returning –3.2% in June and 13.1% YTD.
The Australian residential property market experienced a –0.9% change month on month represented by Core Logic’s five capital city aggregate. Sydney (-1.6%) and Melbourne (-1.1%) were the worst performers whilst Adelaide continues to show strength (+1.3%) with Brisbane (+0.2%) and Perth (+0.4%) staying relatively neutral.
A new economic environment
23 June 2022
After years of low inflation and low interest rates, we have finally entered a new period in the economic environment of higher inflation and higher interest rates. But how high will inflation be and by how much will interest rates rise? Periods of transition from a market perspective increase uncertainty and subsequently increase market volatility.
Market Developments during May 2022 included:
Australian Equities
The Australian share market finished May 2022 with the S&P/ASX 200 falling sharply by -2.6% and ten out of eleven sectors finishing lower. The Materials sector was the only positive finisher for the month (+0.1%). The Property (-8.7%) and Information Technology (-8.7%) sectors led the sell-off as persistently higher inflationary figures, geopolitical tensions and tapering fears supressed equities.
The Materials sector outperformance was primarily driven by the Ukraine and Russia geopolitical situation given the significant disruption to supply within commodity markets. The Property sector suffered heavy losses as investors evaluated the commencement of the tightening monetary policy for the first time in over a decade. Likewise, the rout in the Information Technology sector continued as rising interest rates worldwide and potential recessionary fears subdued growth stocks.
Overall, the sharp decline was triggered by a mixture of elevated inflationary figures arising from the ongoing Ukrainian conflict, Chinese lockdowns, and the ensuing monetary policy response from central banks worldwide.
This scenario has continued into the first weeks of June and we have seen the Australian S&P/ASX200 fall by more than 600 points – month to date.
Global Equities
Downward velocity in global markets tempered over the month of May as the war in Ukraine endures, inflation continues to escalate and Covid restrictions in China persist. Developed markets marginally fell by -0.8% by month end, Global small caps didn’t fare as well as their large cap counterparts closing with a -1.5% loss. Emerging markets performed similarly to the previous period falling by -0.5%, whereas Asian markets posted a modest gain of 0.2%.
Investor sentiment continues to be challenged by geopolitical risk and inflation pressures as central banks contemplate the pace and quantum of rate rises required to stem the tide of rising costs of living.
June has seen further falls, mainly in response to a higher than anticipated move by the US Federal Reserve to increase interest rates by 0.75% as they battle to rein in higher than expected inflationary pressures.
Fixed Interest
The past month has seen a continued rise in bond yields, following The Reserve Bank of Australia raising the cash rate on May 3rd by 25bps to a 0.35% cash rate. With higher yields across the curve, combined with the outlook of risks to growth, bonds are again beginning to show some of the benefits of diversification in a portfolio. Since the start of May, Australian 2 Year Government Bonds have increased by 2bps while Australian 10 Year Government Bonds rose by 22bps as at the end of the month.
A subsequent rate rise on 7 June saw the Australian official cash rate increase to 0.85%. This was followed by a higher than expected increase by the Federal Reserve in the US. Further rate rises are anticipated.
REITs (listed property securities)
Local and Global REITs sold off during May. Domestically, the A-REITS Index (represented by the S&P/ASX 200 A-REIT Accumulation Index) ended the month -8.7% lower, the second worst monthly performance since May 2020, with January of this year taking first prize (-9.5%). The Index has returned -14.7%on a total return basis YTD to 31 May.
Global REITs outperformed the local REITs index, albeit still experiencing a drawdown of -4.5% during the month. Domestically, infrastructure (represented by the S&P/ASX Infrastructure Index) has continued its divergence from A-REITs, returning 1.2% in May and 16.9% YTD. A large driving force behind the divergence may be explained by the high levels of financial leverage common across the REITs sector.
Growth continued to slow across the residential domestic property market during May, with Sydney, Melbourne, and Canberra all returning negative returns of -0.1%, -0.7% and -0.1%, respectively. Adelaide experienced the largest increase of 1.8% for the month. The 5 capital city aggregate changed by -0.4% MoM. (CoreLogic)
Economic overview and market update
26 May 2022
As foreshadowed in the last newsletter, Australia saw the first increase in the cash rate in 11 years in early May – moving from 0.10 to 0.35%. This was expected by markets, and is unlikely to be the last rise, with inflationary pressures building in Australia and across the world.
China has continued to enforce strict lockdown measures with Shanghai and Beijing both in lockdown. This has resulted in further disruptions to global manufacturing supply chains. Continued disruptions to raw material supply (energy, fertiliser, food) resulting from the Russia-Ukraine conflict has added to the pressures on global markets.
Markets have responded with increased volatility and heavy losses have been seen in some sectors – see commentary below.
May Market Developments
Australian Equities
The Australian market closed for the month of April with the S&P/ASX 200 down -0.85% with seven out of eleven sectors finishing higher. Utilities led the index (+9.33%) to continue its strong performance, with Industrials (+3.47%) and Consumer Staples (+3.29%) all performing well. The main detractors of the Index were Technology (-10.37%) and Materials (-4.33%).
High exposure to Resources shares and low exposure to Technology companies has meant the Australian Share Market remains an out-performer relative to global peers. The Technology sector suffered a sizeable sell-off after strong March performance, continuing the trend of high volatility in the sector.
Macroeconomic uncertainty clouded much of the month's headlines with the inflation figures hitting 20-year highs. Australian investors took precautions flocking to defensive sectors over the month leading to the positive performance in Utilities and Consumer Staples. Market volatility is expected to remain high in the short-to-medium term with China's COVID lockdowns hampering growth with increasing supply chain issues.
Global Equities
Global markets descended further over the month of April as 'zero-COVID' lockdowns in China added to prolonged geopolitical risk pressures in Ukraine. Developed markets fell by -3.2% by month end, Global small caps performed modestly better than their large cap counterparts closing with a -2.5% loss. Emerging and Asian markets fared better than the previous month, falling by -0.2% and -1.6% respectively.
Quantitative tightening signalling from central banks has joined geopolitical uncertainty as core focuses for investors as heightened inflation continues to weigh on investor sentiment. Dividend yield and value factors were the best performers over the month returning -1.8% and 2.6% respectively, whilst momentum and quality factors lagged returning -9.7% and -7.9% respectively according to MSCI ACWI Single Factor Indices reported in local currency terms.
Fixed Interest
Fixed interest markets have continued their downturn throughout April, as monetary policy tightens internationally in response to continued elevated levels of inflation. Australia saw yields rise, primarily at the short end of the yield curve, as first quarter inflation of 5.1% proved higher than expected. The yield for 2-year Australian Government bonds increased by approximately 30bps over the course of April, while 10-year Australian Government bonds increased by only around 10bps.
Market expectations of increasing interest rates proved accurate, as in their meeting on 3 May the Reserve Bank of Australia increased the cash rate by 0.25%, an action which has seen yields shoot higher following the announcement.
Internationally the global tightening cycle has been ramping up in an effort to combat inflation. The US Federal Reserve raised the federal funds rate target by a full 50bps on 4 May. Rising global yields have resulted in a return of -2.88% for the Bloomberg Global Aggregate Index (AUD Hedged), with currency fluctuations resulting in the unhedged variant returning -0.12%.
REITs (listed property securities)
The domestic and global REIT indexes slowed during April, with the S&P/ASX 200 A-REIT Index (AUD) (XJO) returning 0.6% for the month and global REIT's, represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged), retracing by - 4.1%, giving back its March advances. The S&P/ASX 200 A-REIT index has returned -6.6% YTD.
Australian infrastructure performed well during April, a result of strong inflation-linked revenue potential, with the S&P/ASX Infrastructure Index TR advancing 6.1% for the month, 15.9% YTD.
The Australian residential property market experienced a +0.3% change month on month represented by CoreLogic's five capital city aggregate. Hobart was the worst performer (-0.30%), with Sydney (-0.20%) and Melbourne (0.0%) not far behind. Adelaide and Brisbane continued to show strength, advancing 1.9% and 1.7% MoM respectively
Boyce are excited to announce Angela Smith as the 2020 Tony Quirk (TQ) Employee of Year
16 December 2021
Judging of the award took place on the 23 November 2021, with 5 outstanding finalists from each office in consideration:
- Susan Walters - Cooma
- Tracy Faichney - Dubbo
- Tara Mills - Goulburn
- Angela Smith - Moree
- James Muir - Wagga
Angela was selected as this year’s winner for her demonstrated genuine care for clients and the team, which was supported by some great client testimonials and her ingrained passion for agriculture and ability to apply this to her role at Boyce.
Working with a broad range of clients, from small farming partnerships and small businesses through to large scale farming operations, Angela is passionate about helping them make informed decisions.
The calibre of finalists was exceptional, and it was particularly exciting to see our team members being recognised by their peers for their contributions to the success of the Firm.