Month in review - June 2022
Written and accurate as at: Jul 21, 2022 Current Stats & Facts
Market volatility has persisted as markets continuously recalibrate to price in forward-looking inflation and the subsequent impact on interest rates and economic growth. We believe this market volatility will continue until there is evidence that inflation has peaked and bond yields have stabilised. Bond yields have been rising, with US 10-year treasuries trading above the 3% mark and Australian 10-year bonds trading above 4% in mid-June 2022. We expect yield volatility to continue over the next six months.
With interest rates rising, there has been increased attention on the risk of recession. The risk of recession has increased as central banks tread the fine line between trying to curb inflation and trying not to strangle economic growth. To date, economic growth remains positive, but some cyclical indicators are softening, indicating that the global economy is slowing. The main issue for the central banks is that monetary policy is a very blunt tool. Raising rates will certainly curb demand; it will do little to address global economies' supply side issues as supply chains remain stressed by the pandemic.
A good example is China, where the hard stance on Covid lockdowns has essentially brought Chinese ports to a standstill. Additionally, the war in Ukraine has driven commodity prices up, including crude oil and agricultural products such as wheat, fertiliser and canola oil. Ukraine and Russia combined to contribute 12% of the world's total calories and are critical suppliers of grains to Africa and the middle east. Therefore, whether we head into a recession will depend on the two key factors of easing supply chain issues and central banks not overplaying their cards by raising rates too high. At this stage, our base case for Australia is that we will avoid a recession and if we do go into recession, it will not be a deep recession.
Australian Equities
The Australian share market closed out the financial year, with the S&P/ASX 200 falling sharply by -8.8% and ten out of eleven sectors finishing lower. Specifically, the Consumer Staples sector was the only positive finisher for the month (+0.2%). The Materials (-12.4%) and Financials ex-Property (-11.8%) sectors were the biggest laggards as recessionary fears weighed down risk assets across various sectors. Similarly, the Information Technology (-11.0%) sector's poor year-to-date performance persisted.
The Consumer Discretionary sector finished lower as retail sales figures continued to surprise the upside despite the increasing interest rate environment and pressure on consumers' discretionary income. The accelerating sell-off in the Materials sector was driven by market participants weighing the potential for recessionary risks given the tightening interest rate cycle and continued inflationary pressures. Likewise, similar sentiment around potentially subdued economic growth drove a sell-off in the Financials sector. Overall, the downtrend equities persisted as investors mulled various negative economic headwinds and continued hawkishness from central banks.
In June, all factors finished negatively, with Momentum (-12.1%) and Equal Weight (-10.7%) being the worst performers. Similarly, Equal Weight (16.74%) and Momentum (15.6%) were the biggest laggards over the past quarter. Enhanced Value (+0.4%) remains the only positive year-to-date factor.
Global Equities
The year's first half concluded with another challenging month in June as inflation, and recession fears continue to erode investor risk sentiment worldwide. Developed markets sharply fell by -4.6% by month end, and Global small caps followed the lead of their large-cap counterparts closing with a more pronounced -6.1% decline. Emerging and Asian markets performed somewhat better than their developed market peers but still fell by -2.6% and -1.8% by month end.
As recession fears heighten and inflation pressure heats up around the globe, central banks continue to be challenged by their now delicate mandate of interest rate settings. Equal Weighted and High Dividend Yield factors were the best performers over the month, returning -4.0% and -5.8%, respectively, whilst Value and Quality factors were the laggards returning -7.6% and -7.3%, respectively, according to MSCI ACWI Single Factor Indices reported in local currency terms.
Fixed Interest
Australian Fixed Income markets have delivered another month of poor returns in June, as the Reserve Bank of Australia continues to tighten monetary policy, raising the cash rate by 50bps in their June and July meetings to a total of 1.35% at present. Despite this, yields remained reasonably stable at the short end of the curve, with such increases already being priced. However, profits continued to increase at the 10-year level by approximately 18bps, resulting in a steepening of the yield curve. Credit spreads also widened considerably throughout June, contributing to the Bloomberg AusBond Composite 0+ Yr Index's poor result of -1.5% over June.
Internationally the story remains similar, as central banks continue raising rates to contain inflation. This can be seen in the US Federal Reserve, which raised the federal funds rate by 75bps in its June meeting, the first hike of such a magnitude since 1994.
However, fears of a recession have seen yields fall further out on the yield curve. Overall performance in global Fixed Income markets has been weak throughout June, as the rate increases at the short end of the curve have been more impactful. The Bloomberg Barclays Global Aggregate Index (AUD Hedged) Index experienced significant currency fluctuations resulting in the hedged variant returning 1% for the month.
REITs (listed property securities)
Local and Global REITs continued to sell off. Domestically the A-REIT index (represented by the S&P/ASX 200 A-REIT Accumulation Index) ended the month –10.3% lower, providing the worst monthly performance since March 2020.
The index has returned –23.5% on a total return basis YTD to 30 June. Global REITS slightly outperformed the local REIT index, albeit still experiencing a significant drawdown of –7.6% during the month. Despite the poor performance, globally, the all Equity REITs index (-6.4%) remains ahead of the Total Stock Market Index (-10.7%) since the Russia and Ukraine conflict. Domestically, infrastructure (represented by the S&P/ASX Infrastructure Index) has turned negative this month, returning –3.2% in June and 13.1% YTD.
June was quiet on the M&A front across the A-REIT sector. SCA Property Group (ASX: SCP) agreed with Centuria Capital Group's (ASX: CNI) subsidiary, Primewest, to acquire five shopping centres across Australia for an agreed price of $180mn. This represents a 24% premium to book value for Centuria and provides a guaranteed performance fee of $5.7mn.
The Australian residential property market experienced a –0.9% change month on month, represented by Core Logic's five capital city aggregate. Sydney (-1.6%) and Melbourne (-1.1%) were the worst performers, whilst Adelaide continues to show strength (+1.3%), with Brisbane (+0.2%) and Perth (+0.4%) staying relatively neutral.
Alternatives
Preliminary estimates for June indicate that the index decreased by 1.6 per cent (on a monthly average basis) in SDR terms after declining by 5.3 per cent in May (revised). The rural, non-rural and base metals subindices all decreased in the month. In Australian dollar terms, the index fell by 1.5 per cent in June. Over the past year, the index has increased by 24.3 per cent in SDR terms, led by higher LNG, coking coal and thermal coal prices. The index has risen by 26.1 per cent in Australian dollar terms.