Financial market and economic month in review - August 2022
Written and accurate as at: Sep 09, 2022 Current Stats & Facts
Global shares
Global equity markets struggled during August as hawkish commentary from the Federal Reserve’s annual Jackson Hole symposium softened investor sentiment. The building narrative of a nearer-term Fed pivot was compromised, with expectations now that the current rate tightening cycle will remain higher for longer. The MSCI AC World Index was -2.9% in local currency, with Developed Markets -3.4% (Emerging Markets +1.2%). After rallying strongly in July, the S&P 500 declined -4.1% in August (now -16.1% calendar YTD), whilst the NASDAQ fell -4.5% (-24.1% YTD).
Despite this pullback, the S&P 500 closed the month +8.8% from the recent lows reached in June. Equity markets had rallied strongly from their recent June lows, despite increasing evidence of a slowing global economy and emerging downside risk to forward earnings estimates. This resulted from growing expectations for a rate policy pivot by the Fed, post ambiguous comments from Fed officials after the July FOMC meeting and some early signs of inflation peaking.
Fed Chair Jerome Powell dashed this misguided expectation during the month in his Jackson Hole address. It was made clear that the Fed continues to prioritise price stability and will move purposefully to a level of sufficient rates to see inflation return to 2%. He acknowledged that there will likely be economic pain and that growth will likely be below trend for a sustained period’. He also cautioned of the risk associated with loosening policy prematurely. As a result, markets have recalibrated expectations for rates to move higher and remain so for longer, with the heightened risk of a policy-induced recession.
Australian shares
The S&P/ASX 200 outperformed developed markets, rising +1.2% during the month (now -3.6% calendar YTD), as the recently completed domestic reporting season came in better than feared, with more than two-thirds of companies delivering upon, or modestly exceeding, earnings expectations. In absolute terms, it was a solid year of growth, with 23% EPS growth for the S&P/ASX 200, albeit flattered by 38% EPS growth for Resources on the back of rising commodity prices. Industrials (ex Resources, ex Financials) EPS growth was 7%, driven by solid growth in revenues, slightly offset by modestly lower margins.
The S&P/ASX 200, relative to other markets, was also buoyed by the strength of Resource stocks (+5.9%) relative to Industrials (+0.4%). In terms of S&P/ASX 200 sector performance, Energy (+7.8%) and Materials (+4.4%) strongly outperformed. This was more reflective of strong reported earnings and cash distributions than recent commodity price trends, which have been less supportive. Communication Services (+2.5%) and Industrials (+1.2%) also outperformed the broader index. The strong rise in bond yields and softer forward guidance for several stocks saw REITs (-3.2%) as the largest underperformer, whilst signs of customers trading down saw Consumer Staples (-1.8%) lower given investors’ defensive positioning in the sector. Utilities (-1.6%), Financials (-0.6%), Information Technology (-0.1%), Health Care (+0.4%), and Consumer Discretionary (+0.9%) also underperformed the S&P/ASX 200.
Bonds
Bond markets are priced in a more hawkish outlook, with the Australian ten-year yield rising 54 b.p. to 3.60%, and US yields +49 b.p. to 3.13%. As expected, the RBA raised official cash rates by a further 50 b.p. to 1.85%, with a further 50 b.p. increase post-month end to 2.35%.
Commodities
Commodity prices declined in August. Oil dropped -13.5% to US$96.50/barrel as the demand outlook weakened and a de-escalation in Iraq stabilised oil exports. Iron ore prices were -2.3% as COVID continues to impact the demand outlook out of China, whilst Copper was -1.0%. Gold retraced -2.8% on USD strength as the Fed doubled down on its resolve to curb inflation. Thermal coal remains strong, with prices +4.2% to US$425.
Australian Economy
Consumer demand has to date proven more resilient than many feared in the face of rising interest rates and higher inflation, with activity levels continuing to defy a sharp deterioration in sentiment indicators. There are signs of raw input prices peaking, whilst supply chain bottlenecks and logistics costs continue to normalise. Labour shortages remain acute in certain sectors (such as mining, construction, and healthcare), whilst there is a watching brief for any signs of more broad-based wage inflation.
Several companies have demonstrated an ability to pass through cost increases and maintain margins effectively. However, passing further cost rises onto consumers may become more challenging as the demand outlook softens. Quality companies are typically better placed to pass on higher costs and are less capital intensive (areas facing additional inflationary pressures). As global economic growth slows, well-managed companies with strong balance sheets, scalability and resilient earnings streams are likely to be continued support