It’s hard to believe we’re nearly halfway through 2022. With the end of the Financial Year fast approaching it’s time to make sure we tick off all those EOFY tasks and revisit your objectives so you can start kicking financial goals in the 2022/2023 Financial Year. If you want to talk to us about your situation and how we can help, we’d love to hear from you.
The March Quarter 2022 brought with it increased volatility and uncertainty, with both equity and bond markets undergoing corrections. The question that has been dominating Central Banks conversations around the world: “Is inflation transitory or sustained?”
In this issue of ‘Parc Perspectives’ we will look into current world events and issues that are impacting the financial landscape.
In this Issue:
- What is the Impact of Geopolitical Instability on Globalisation?
- Market Update – Is it goodbye to the Bull Market?
- Investor Outlook
What is the Impact of Geopolitical Instability on Globalisation?
Well, much has happened since February 2022 to answer that question, particularly the escalation of the Russia/Ukraine conflict with Russia invading Ukraine. As these two countries are major exporters of energy (e.g. oil and gas) and food (e.g. grain crops – wheat, corn, barley and sunflower), the war caused commodity prices to rise both quickly and sharply. This unforeseen rise in commodity prices only further added to the existing significant inflationary pressures from the major supply chain disruptions due to COVID 19. These inflation pressures had already unsettled financial markets and the sanctions on Russia only added to these pressures with reduced global supply of essential energy and food commodities. The sanctions particularly impact Europe as Russia is a major source of oil and gas, and the Middle East and North Africa who are major importers of Russian grain. One wide-ranging outcome of the geopolitical repercussions of the Russian invasion is that the Western world has started to rethink the security of its supply chains and borders. This will most probably lead to some reversal of the decades long trend to globalisation with many countries re-establishing strategic and essential industries rather than outsourcing to lower cost-base countries. Both COVID 19 and the Russian Invasion have changed the dynamics of global trade and domestic security going forward.
The narrative that inflation was “transitory” has now shifted towards “sustained” and Central Banks have indicated that interest rates will continue to rise in order to manage inflation. Headline inflation in the US reached 8.5 per cent almost a 40-year high in March 2022, this has caused the US Federal Reserve (the Fed) into taking an increasingly hawkish tone. It should also be noted that the reversing of the globalisation trend will also initially be slightly inflationary, as domestic costs such as labour will typically be higher than offshore.
We will continue to provide updates on this situation and monitor effects on the Financial Markets and impacts on our clients’ portfolios.
Market Update – Is it goodbye to the Bull Market?
Despite the shocks of war, inflation, and rising interest rates the Australian share market (S&P/ASX 300) largely ignored the negative sentiment in other markets and delivered a 2.1% return over the March quarter, its sixth consecutive quarterly gain. The commodity supply shock that saw spiking prices, benefited the Australian market due to its heavy exposure to the resources sector (e.g. BHP. Rio Tinto, Woodside, Santos). The Australian market performance was also helped by a strong corporate reporting season in February. Sector performance was the strongest amongst Energy (+28.4%) helped by higher Crude Oil prices (+32%), Thermal Coal (+53%) and Coking Coal (+44%) prices) and Materials (+15.2%). Of course, every positive must have a negative and several sectors that are sensitive to rising interest rates were poor performers. This included Information Technology (-13.7%), Consumer Discretionary (-10.4%), and Health Care (-10.1%). Global share markets were a very different story to the Australian share market. Almost all developed international share markets ended the quarter with negative returns, with the MSCI World ex Australia index returning -8.4% in Australian dollars. Emerging share markets fared worse with the index recording a -9.9% return in Australian Dollars. This was particularly due to the poor performance of the Chinese market for the quarter, largely driven by renewed COVID-19 outbreaks leading to severe lockdowns in some major cities and the forced closure of all retail and much of the manufacturing in those areas.
The Australian and global bond market posted negative performance as yields increased sharply over the quarter, returning -5.9% and -5.0% respectively. A feature of bonds is that when bond yields rise their prices fall. The rise in yields was driven by expectations of Central Banks raising interest rates aggressively as inflation appeared to be higher and more persistent than previously expected. It should be noted that the March quarter was almost a ‘Perfect Storm’ for investors as both a negative inflation outlook and rising interest rates caused both equity and bond markets to post negative returns. That is, there were few places to hide other than cash, which is still returning a negative real yield (i.e. sub the inflation rate).
Recent communication from global Central Banks is that higher interest rates are needed to lower inflation and that economies, such as the US are strong enough to withstand these hikes without increasing the risk of a recession. We can only wait and see if their thesis proves correct! Although the inflationary pressures in Australia are currently lower than in the US, there has seen a noticeable pick-up in domestic inflation, and this has many pricing in interest rate rises in line with the US Federal Reserve with the Australian cash rate projected to be 2.00% by the end of the year. It is important to put the March 2022 bond market performance in context, it was the worst month since the bond market crash in 1994.
Investor Outlook – New Investment Opportunities will Emerge
For investors, the outlook is that the market has entered a new economic paradigm of rising inflation and interest rates – the 30-year bull market of decreasing interest rates is no longer! That is, the economic and market environments going forward are going to be different to what investors have experienced for the past decade or so. There will be ongoing financial market volatility whilst markets re-equilibrate to the economic paradigm and establish a new base consistent with the investment outlook.
However, this should not be considered as ‘Doom and Gloom’ but rather positively as new investment opportunities will emerge. A sage investor should always remember that it is ‘Time in markets not timing the market’ that creates long term wealth.
If you have any questions about any of the topics in this newsletter or would like to discuss anything further, please contact our office on 03 9527 1600.
Parc Wealth Management is a Corporate Authorised Representative of Parc Wealth Group Pty Ltd ABN 24 652 326 915 | AFSL 535090
Any information in this article is general advice only and does not constitute personal or product advice. This information has been provided by Parc Wealth Management Pty Ltd and does not take into account your objectives, financial situation or needs. You should consider whether the information contained within this information is appropriate for you. Where we refer to a financial product, you should obtain the relevant Product Disclosure Statement or offer document and consider it before making any decision about whether to acquire the product.