Month in review - July 2022
Written and accurate as at: Aug 10, 2022 Current Stats & Facts
The heat has been on with central banks worldwide trying to keep inflation under control. We have seen three consecutive rate rises by the RBA, the most numerous since 2010. We have observed similar monetary policy tightening action in other jurisdictions, notably the US, where the last inflation read was 8.6%. Central banks are walking a tightrope attempting to manage inflation while simultaneously trying to avoid a material economic slowdown.
One of the challenges is that many of the inflationary pressures we have observed have been driven by supply-side issues caused by the pandemic and the subsequent pressure on supply chains. This has been coupled with the war in Ukraine, which has driven the price of everything from building materials to food and energy costs.
There are some initial signs, however, that the heat may be coming off some areas that have been driving inflation. Globally, there is evidence weaker demand is coming through, reflected in weaker PMI figures, opening up some spare capacity and allowing supply conditions to improve. Notably, indicators such as Global Manufacturing PMI supplier delivery times are showing signs of improvement, suggesting goods are beginning to move again, and the S&P Global Supply Side Shortages Indicator is easing.
Other signs of the heat coming out of the economy are evident. The housing sector is the most visible and arguably high-profile, given many of us have exposure. According to CoreLogic data, the Australian housing market shows signs of softening, with auction clearance rates at two-year lows. Sydney has recorded the sharpest house price fall, declining 1.6% in June. We have also seen a string of construction companies go into liquidation, the most recent being Langford Jones Homes in Victoria. Market developments during July 2022 included:
Australian Equities
The Australian share market finished July, with the S&P/ASX 200 rebounding sharply by 5.75% and ten out of eleven sectors finishing higher. The Information Technology (+15.23%) and Property (+11.93%) sectors led the rebound for the month. Meanwhile, the only negative finisher for the month was the Materials (- 0.67%) sector.
Throughout the month, market participants continued to evaluate worldwide central bank monetary policy and the release of economic data as the broader market enjoyed' a relief rally. In particular, sectors with long-duration exposure rebounded after months of intense selling pressure amid rising interest rates and inflationary pressures. As a result, the Information Technology and Property sector rallied as investors rotated into sectors previously out of favour with significant year-to-date losses. In contrast, the Materials sector was a notable underperformer as worldwide recessionary fears intensified, given the continuing geopolitical and macroeconomic uncertainty.
In July, all factors finished positively, with Equal Weight (+10.82%) and Momentum (+7.24%) being the strongest performers. Enhanced Value (+7.22%) and Value (+1.13%) were the only positive year-to-date performers. Over the past twelve months, these same factors were the best performers, gaining 10.05% and 6.20%, respectively.
Global Equities
Worldwide risk assets saw a positive return for the first time since December last year over July, albeit with recession fears evolving into reality in the US. Developed markets steeply increased by 6.4%, with Global small caps outperforming their large-cap counterparts producing an 8.0% return by month end. Emerging and Asian markets did not fare as well as their Developed market peers, returning -1.7% and - 0.6%, respectively.
As economic data continues to indicate a slowing global economy and inflation rises, July's respite was primarily driven by markets pricing in potential interest rate cuts by central banks in 2023. Quality and Growth factors were the best performers over the month, returning 7.8% and 7.4%, respectively, whilst Dividend Yield and Value were the laggards returning 2.2% and 2.1%, respectively, according to MSCI ACWI Single Factor Indices reported in local currency terms.
Fixed Interest
Building inflation concerns, recession fears and interest rate hikes have dominated and influenced global fixed income markets throughout July. Due to softening economic data, the 10-year global bond yields declined sharply in July. A broad relief rally in global bonds reversed some of the YTD underperformance. Australian 2 Year Bonds remained relatively stable, rising by only 7bps, while Australian 10 Year Bonds steadily dropped by 60bps throughout the month. With the decline in bond yields and the narrowing of credit spreads, the Bloomberg Ausbond Composite Index gained 3.36% in July.
Globally, the story is much the same as markets increase expectations for future Federal Reserve rate hikes. Inflation in the US has now accelerated to 9.1%, the highest since 1981. Following the 26-27 July meeting, the Federal Reserve increased interest rates by 75bps, bringing the annual rate to 2.25%. Throughout July, US 90 Day T- Bills rose by 69bps while US 10 Year Bonds dropped 37bps. July relieved global bonds, with the Bloomberg Barclays Global Aggregate Index (AUD hedged) returning 2.49% during the month. Persistent inflation pressures, supply chain problems and tightening monetary policy will continue affecting local and global fixed income markets for some time.
REITs (listed property securities)
July experienced a significant turnaround in performance for both the local A-REIT market and the broader Global real estate equities market with the S&P/ASX 200 A-REIT Index (AUD) and the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged) advancing 11.9% and 7.7% MoM, respectively.
Globally, REITs have been bolstered by a strong second-quarter earnings season, and investors have largely priced in the effects of the Fed's monetary policy. Australian infrastructure performed well during July, with the S&P/ASX Infrastructure Index TR advancing 1.2% for the month and 14.4% YTD.
M&A activity during March across the A-Reit Sector saw Charter Hall Retail REIT (ASX: CQR) acquire 18 service stations in New Zealand and further expand their partnership with Ampol Ltd, acquiring 5% interest in an existing Charter Hall partnership which owns 204 Ampol service stations. The combined value of the acquisitions is $101.7mn and will be funded from existing investment capacity. Growth Point Properties (ASX: GOZ) also announced they would acquire 100% of Fortius Funds Management for a value of $45mn. This transaction adds $1.9bn third-party funds to Growthpoint, increasing their total assets under management to $7.2bn.
The Australian residential property market experienced a –1.4% change month on month, represented by CoreLogic's five capital city aggregate. Sydney (-2.2%), Melbourne (-1.5%) and Brisbane (- 0.9%) were the worst performers. Adelaide continues to show strength (+0.4%), moving to +24% YoY, with Perth (+0.2%) staying relatively neutral.
Alternatives
Preliminary estimates for July indicate that the index decreased by 8.5 per cent (on a monthly average basis) in SDR terms after falling by 2.8 per cent in June (revised). The rural, non-rural and base metals subindices all decreased in the month. In Australian dollar terms, the index fell by 7.6 per cent in July. Over the past year, the index has increased by 14.1 per cent in SDR terms, led by higher LNG, coking coal and thermal coal prices. The index has risen by 14.4 per cent in Australian dollar terms.