July 2022​

Economic and Market Commentary


The first month of FY23 came as a welcome relief to investors who have endured a terrible first half of the calendar year. Domestic share investors embraced the bear market rally that began in June, with the S&P/ASX 200 gaining nearly 5.8% including dividends. Small caps snapped back, posting double digit returns, following steep losses in the June quarter as liquidity evaporated. Resources pared some of this year’s gains, while technology, property and the banks staged a strong rebound.

In global shares, the S&P 500 gained 9% in local currency terms, posting its best month since November 2020 and Nasdaq had its strongest performance since April of that same year. Markets held firm despite the US posting consecutive quarters of negative growth, which traditionally defines a technical recession. Government officials were quick to point out that an official recession had not yet been declared.

The key focus was again on the US Federal Reserve (the Fed), which hiked official interest rates by another 0.75% in July. But for investors, hope springs eternal and this saw renewed optimism that the Fed had turned more dovish, with Chairman Powell turning to the time-tested phrase “data dependent” as guidance for the magnitude of future increases expected in September, November, and December. Elsewhere, bond markets rallied strongly, reversing much of the sharp rise in yields that had played out in preceding months. Also, battered crypto investors breathed a welcome sigh of relief, with the volatile sector posting strong gains.

Asset class returns

Market Commentary

Developed market equities and bonds staged much-needed relief rallies in the month of July. The move higher came on the back of growing market anticipation that the course of US interest rates would become more favourable (i.e., less steep) throughout the remainder of 2022. Market moves were consistent with the view that the US was at peak inflation such that the Fed would be more reluctant to continue the current trajectory of rate hikes. This was reflected in declining inflationary expectations and increased bets that the US would see a slowdown in economic activity.

Global growth stocks were key beneficiaries of the change in market sentiment and the better-than- expected US quarterly earnings season. In emerging market equities, the rebound in the Indian and South Korean markets was more than matched by weakness in Chinese shares, where real estate concerns led the market lower. Overall, emerging market equities ended July in the red and was the worst performing major asset class.

In fixed interest markets, falling sovereign bond yields were coupled with tighter credit spreads, as investors gained more confidence that any economic slowdown would likely be shallow, thereby avoiding a spate of corporate defaults. This combination of moves cemented global high yield as the best performing fixed income sector in July. In currency markets, the risk-on environment shielded the Australian dollar from further strength in the greenback. Meanwhile, gold continued its recent downward trend. Finally, crypto investors breathed a sigh of relief as Bitcoin rallied strongly throughout the month, gaining nearly 30% in July.

Economic Commentary

On the domestic economic front, the Reserve Bank continued to hike the official cash rate in July by a further 0.5% in a bid to quell domestic demand. Including August, it has raised rates by 1.75% in response to rising inflation pressures, much of which has emanated from global supply side factors. Elsewhere, the Treasury has raised its CPI inflation projections for 2022 to nearly 8%, and several notable bank economists raised their estimates for inflation and interest rates, with consensus for the latter now sitting well above 3%. This has happened just as markets have priced for lower than previously expected interest rate rises. Also notable in the month was the release of the June labour market report, where the unemployment rate printed at a near fiftyyear low of just 3.5%. Among global economies, the US entered a ‘technical’ recession with the release of its 2nd quarter GDP growth estimate, which revealed another contraction. This comes at a time where annual CPI inflation in the US reached 9% in June and services inflation was broader than in previous months. The US yield curve is now inverted between 2yrs and 10yrs, a sign that more tough times lie ahead. Elsewhere, Germany narrowly avoided an economic contraction in the June quarter, but high inflation throughout Europe saw the European Central Bank deliver its first interest rate hike since 2011, taking the Eurozone out of negative rates. In the UK, Prime Minister Boris Johnson resigned after he lost the support of his parliamentary party. This comes at a time where inflation is surging, while growth is stagnating. Finally, China’s property market was dealt another blow as disgruntled new home buyers ceased making mortgage repayments in response to stalled construction projects.

Disclaimer: This economic and market update has been prepared by Evergreen Fund Managers Pty Ltd, trading as Evergreen Consultants, AFSL 486 275, ABN 75 602 703 202 and contains general advice only.

It is intended for Advisers use only and is not to be distributed to retail clients without the consent of Evergreen Consultants. Information contained within this update has been prepared as general advice only as it does not take into account any person’s investment objectives, financial situation or particular needs. The update is not intended to represent or be a substitute for specific financial, taxation or investment advice and should not be relied upon as such.

All assumptions and examples are based on current laws (as at June 2023) and the continuance of these laws and Evergreen Consultants’ interpretation of them. Evergreen Consultants does not undertake to notify its recipients of changes in the law or its interpretation. All examples are for illustration purposes only and may not apply to your circumstances.