Global equity markets were sold off heavily in the June quarter, with higher inflation and higher interest rates being the main source of concern for investors.
Bond yields continued to climb higher, with central banks pushing up cash rates in response to inflation.
A weaker $A cushioned some of the losses for Australian investors with unhedged currency exposures, as did a slightly better performing local stock market.
International Equities
Share markets across the globe were sold off heavily over the past quarter with the majority of losses being experienced in mid-June, following the release of inflation data in the U.S. This data showed annual inflation at 8.6%, the highest rate recorded since 1981.
Surging inflation has prompted fears that interest rates will have to be pushed higher, thereby further constraining household expenditure, already under pressure from increased living costs.
Expectations that higher interest rates would create a recession have firmed, particularly in the U.S., where the S&P 500 Index dropped 16.1% last quarter. In addition to the inflation and recession related concerns, the U.S. market also suffered from having a high proportion of “growth” orientated equities, particularly in the Information Technology Sector.
Those companies reliant on earnings growth in future years (rather than current earnings) typically have their valuations more heavily impacted when interest rates rise. Losses in other developed markets were less significant, with the U.K. being one of the better performers due to its exposure to the energy sector, which benefited from the maintenance of high oil and gas prices.
In contrast to the broader global trend, the Chinese equity market rallied, with a significant gain of 7.3% recorded. Some easing in COVID lockdown arrangements, including the reduction in quarantine requirements for international arrivals being reduced from 2 weeks to 1 week, contributed to positive investor sentiment.
Following a period of strong resilience, infrastructure stocks declined in value by an average of 4.9% during the June quarter. Although less impacted by concerns of an economic downturn, the ongoing rise in interest rates may have been a negative influence last quarter, as higher yields make infrastructure returns less attractive on a relative basis.
None-the-less, infrastructure still outperformed the general global equity market, extending the outperformance over the past 12 months to more than 20%.
With infrastructure providing an exposure to inflation linked cashflows, it has been less impacted by the concerns stemming from rising price pressures. In contrast, cash flows associated with property are considered to be more cyclical than infrastructure, with property trusts being sold off by 15.6% globally and by 17.5% locally over the past quarter.
Australian Equities
Losses on the Australian equity market were more limited than the global average last quarter, with the S&P ASX 200 Index outperforming globale quities by 3.2% in the 3 months to June. A relatively low exposure to “growth” styled equities and a higher exposure to energy are two key contributors to this outperformance.
More defensively positioned sectors have also avoided the bulk of the sell-down, with utilities finishing the quarter in positive territory whilst healthcare and consumer staples experienced only minor losses. These sectors have been moresought afterby investors given the expectation that revenues will be less sensitive to any decline in the broader economic cycle.
As was the case globally, Information Technology stocks recorded a large decline, with the sector falling in value by 27.2%. Losses in the sector over the past year are now 38.2%.
After showing considerable strength earlier in the year, resource stocks were sold off by a sizeable 13.8% over the quarter, with iron ore prices (down 18%) pulling back from earlier highs and various base metal prices declining.
Also contributing significantly to the negative performance of the Australian share market was a large decline in banking stocks last quarter. Although higher interest rates do provide some scope for wider interest rate margins, investors became more concerned that the extent of the rise in interest rates would impact negatively on both the volume of new lending and expenses associated with bad & doubtful debts. Higher interest rates could increase the proportion of borrowers defaulting on loans; whilst also reducing loan recovery rates if the property held as loan security declined in value.
Fixed Interest & Currencies
Central banks across the globe lifted cash interest rates over the June quarter. In Australia, the cash interest rate is now 1.35%, following rate increases in May, June and early July.
With central banks indicating further interest rate increases will be required, longer term interest rates also adjusted upwards sharply over the quarter. U.S. 10- year Treasury Bond yields rose from 2.32% to 2.98%.
Increases on Australian bond markets were more significant, with the Australian 10-year government bond yield jumping 0.82% to 3.66%. Despite the larger increase in local bond yields, which should make it more attractive to hold $As, the Australian dollar declined last quarter. Against the $US, the $A fell from U.S. 74.8 cents to U.S. 68.9 cents. Weaker commodity prices are likely to have been a factor in pushing the $A lower, with the local currency also dropping 1.7% against the Euro.
Important Information
The following indexes are used to report asset classperformance: ASX S&P 200 Index, MSCI World Index ex Australia net AUD TR (composite of 50% hedged and 50% unhedged), FTSE EPRA/NAREIT Developed REITs Index Net TRI AUD Hedged, Bloomberg AusBond Composite 0 Yr Index, Barclays GlobalAggregate ($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 Pty Ltd (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 thourgh a financial adviser. Past Performance is not a reliable indicator of future performance.