Share markets moved sharply lower over January in response to expectations of higher interest rates.
Higher inflation prompted the US central bank to indicate an imminent policy tightening, causing bond yields to rise.
The $A declined against the $US and Euro, despite stronger iron ore prices.
Significant losses were recorded across most major developed share markets last month. Although the declines marked the largest monthly fall since the COVID-19 crisis related drop in March 2020, share markets still remain well ahead of where they were 12 months ago. Indications from the US Federal Reserve Bank that it was likely to raise rates in March, following further evidence of inflation, appeared to be the main trigger for the January decline. Inflation has reached 7.0% in the U.S., which is the highest rate recorded since 1982. Also weighing on sentiment was the ongoing build up of Russian military presence on the Ukraine border.
Earnings reporting season and ongoing evidence of strong economic growth failed to outweigh the inflation and interest rate concerns on the U.S. market, with the S&P 500 Index dropping 5.2%. The heavy weighting of the U.S. market to both Information Technology stocks and companies previously bid up in price due to higher earnings prospects, explains some of the weakness in the U.S. market. Higher interest rates reduce the present value of earnings expected to be made in future years and therefore company valuations more reliant on future years (rather than current year) earnings were sold down more heavily. This rotation away from “growth” stocks had less of an impact on marketslike Germany (down 2.6%) and France (down 2.4%). The U.K. market actually finished in positive territory (up 2.3%), with its higher exposure to energy benefiting from rising oil prices over the month.
Within emerging markets, share market performance was generally stronger as the strength in oil prices, which jumped 17%, boosted Middle Eastern markets; whilst increases in other commodity prices supported South American returns. China, once again, recorded significant price decline, although Hong Kong’sHang Seng Index rose 1.7%, with that market’sorientation to financialsshielding it from losses.
Despite a continuation in the bounce in iron ore prices (up 21%), the Australian market underperformed the global average over January. Resources (up 3.0%) and energy (up 7.9%) did show price increase, although this was offset by large losses elsewhere.
As was the case globally, the Information Technology sector declined sharply, falling 18.4% in January, which followed a 5.3% drop in December. Other key contributors to market weakness were the healthcare sector,where a 10.5% fall in the price of CSL weighed heavily, and the financial sector, which dropped 6.5%. The fall in banking stocks may have been considered a little surprising given rising interest rates provide scope for banks to improve interest rate margins. There were mixed results within Property & Infrastructure, with the Australian listed property sector sold down more than global counterparts, with a decline of 9.4% following a period of strong recovery. Infrastructure proved to be more stable, with global stocks broadly flat and the Australian utilities sector rising 2.6%.
Fixed Interest & Currencies
Higher inflation was the key focus of bond markets. Annual inflation readings of 7.0% in the U.S. and 5.4% in the U.K. were prime examples. The higher inflation in these economies has prompted a response by central banks, with the Bank of England raising the cash rate twice in recent months, from 0.1% to 0.25%. Although the U.S. Federal Reserve Bank has yet to make any change in cash interest rates, it hasstarted to wind back its bond purchase program. The Chairman, Mr. Powell, stated in January that “the committee is of a mind to raise the federal funds rate at the March meeting.” With inflation evidently higher in various overseas economiesthan in Australia (where our December quarter CPIshowed annual inflation at 3.5%), global bond yields rose by more than domestic yields last month. The U.S. 10-year Treasury bond yield jumped by 0.27% to 1.79% over January, with the Australian equivalent rising from 1.67% to 1.88%. These higher yields saw bond prices fall, creating negative returns for fixed interest investors.
The higher global interest rates, and the lack of indication from the Australian Reserve Bank of any short term plans for a rate rise, may have contributed to some weakness in $A last month. Despite the strength of commodity prices, the $A dropped from US 72.6 cents to US 70.1 cents and was also approximately 2% weaker against the Euro. This currency depreciation helped cushion the fall in global equity valuations for investors with unhedged currency exposures.
The following indexes are used to report asset class performance: ASX S&P 200 Index, MSCI World Index ex Australia net AUD TR (composite of 50% hedged and 50% unhedged), FTSE EPRA/NAREIT Developed REITs Index Net TRI AUD Hedged, Bloomberg AusBond Composite 0 YrIndex, Barclays Global Aggregate ($A Hedged), Bloomberg AusBond Bank Bill Index, S&P ASX 300 A-REIT (Sector) TR Index AUD, S&P Global Infrastructure NR Index (AUD Hedged).
General Advice Disclaimer
This document has been prepared by Sage Advisers (AFSL 238039). Any advice provided is of a general nature and does not take into account personal circumstances. Any decision to invest in products mentioned in this document should only be made after reviewing the relevant Product Disclosure Statements. Should the reader wish to avail of using the above investment philosophy they should only do so firstly seeking personal financial advice through a financial planner. Past performance is not a reliable indicator of future performance.