Developments in financial markets
Written and accurate as at: May 11, 2022 Current Stats & Facts
Australian equities
The Australian market closed for 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 leading 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 outperformer relative to global peers. The Technology sector suffered a sizeable selloff after strong March performance, continuing the trend of high volatility in the industry.
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.
In April, the top-performing factors were enhanced value (+4.92%) and Low Volatility (3.10%). Neutral or negative performance was seen across most factors, with Momentum (-1.95%) and Growth (-1.92%) being the weakest factors. Over the past 12 months, Enhanced Value has been the top performer (+22.5%).
Global equities
Global markets descended further over 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. Returns in AUD were assisted by the softer AUD over the month, as signified by the local currency return of the MSCI World ex Australia Index (LCL) of -7.0%.
Quantitative tightening signalling from central banks has joined geopolitical uncertainty as core focuses for investors as heightened inflation weighs 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.
Property
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 REITs, 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 AREIT index has returned -6.6% YTD. Global REITs, especially within the industrial sector, experienced a sharp sell-off in late April after Amazon’s CFO stated, "we have too much space right now versus our demand patterns" (Nareit, 2022).
Australian infrastructure performed well during April due to inflation-linked solid revenue potential, with the S&P/ASX Infrastructure Index TR advancing 6.1% for the month, 15.9% YTD. April was quiet on the M&A front for the Australian AREIT sector. Dexus (ASX: DXS) announced a Share Sale and Purchase Agreement with Collimate Capital Limited, a wholly-owned subsidiary of AMP Limited, to acquire their real estate and domestic infrastructure equity business. Consideration includes $250m in upfront cash and an earn-out consideration of $300m, subject to various factors.
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.
Fixed income/Bonds
Fixed interest markets have continued their downturn throughout April as monetary policy tightens internationally in response to continued elevated inflation levels. 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 throughout April, while 10- year Australian Government bonds increased by only around 10bps.
Credit spreads also continued to widen over the month, contributing to the Bloomberg AusBond Composite 0+ Yr Index returning -1.49% throughout April. Market expectations of increasing interest rates proved accurate. In their meeting on 3rd May, the Reserve Bank of Australia increased the cash rate by 0.25%, which has seen yields shoot higher following the announcement.
Internationally the global tightening cycle has been ramping up to combat inflation. The US Federal Reserve raised the federal funds rate target by 50bps on the 4th of 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%.