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
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 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 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