The month of March and the March quarter, more generally, will be talked about for quite some time The March quarter will be talked about for quite some time by fixed interest investors. Amid continuing higher inflation, bond markets were subjected to a vicious sell-off. This culminated in bond yields rising to levels well beyond what most forecasters had predicted. This meant that returns in traditional fixed interest produced deep losses. The heaviest losses were felt in securities with longer maturities as these securities are more sensitive to interest rate changes. In local bond markets, domestic investors experienced negative returns over a three-year period.
The Australia share market outperformed many of its global peers due to its stronger yield focus and higher-than-average exposure to financials, resources and energy. Over the March quarter, excluding dividends, the S&P/ASX 200 Index outperformed the US S&P 500 by the biggest margin since the December quarter of 2018. The mega-cap tech stocks that dominate the US market tracked sideways for the past three months.
On the economic front, the annual rate of inflation in the US soared to nearly 8% in February, reaching a 40-year high with few signs of slowing. The US Federal Reserve (the Fed) raised rates by 0.25% and upgraded its inflation forecasts, while moderating its growth predictions for 2022 and beyond. Some investors are now expecting a US recession later this year. Russia’s invasion of Ukraine has also weighed on financial markets across the globe.
Source: AUD total returns as at 31 March 2022. Defensive and Growth Assets data are sourced from Financial Express; currency and commodity data are sourced from IRESS.
A combination of economic and geopolitical factors dominated the March quarter, and the impacts were felt across all financial markets. In particular, the Russian invasion of Ukraine and the likelihood of higher interest rate hikes to combat higher inflation, weighed on global markets. Russia is an important energy and commodity producer. Its invasion of Ukraine quickly led to a spike in energy and commodity prices. Not to diminish the human impact of these events, the war immediately exacerbated the surge in inflation, prolonged supply chain disruptions and placed a handbrake on global growth. Oil and gas prices escalated as a risk premium was built into energy prices. Consumers didn’t have to wait long to see this at the fuel bowser.
Expectations for faster and steeper rate hikes in the US contributed to a rally in the US Dollar, which finished the quarter up about 3% against the pound and euro. However, the Australian dollar appreciated even further, as commodity prices spiked. This created larger losses for domestic investors with currency-unhedged global equity exposures. Developed market (DM) equities recovered some of their losses in late March, but remained in the red. The US S&P 500 Index experienced only its twelfth quarter post-WW2 loss of 10%+ from its closing high. Subsequently, in late March, the US S&P 500 Index rallied 10%+ from its intra-quarter lows as investors switched out of bonds back into equities.
Emerging markets (EM) were especially impacted during the March quarter. EM had to contend with geopolitical events and a new round of Omicron cases in China, which weighed on Chinese markets. Elsewhere, gold continued to inch higher in Australian dollar terms. Crypto markets staged a strong rally in unison with the recovery in tech shares during the latter part of the quarter. Oil was volatile but finished the quarter sharply higher.
On the domestic economic front, the labour market continued to strengthen with anecdotal evidence of labour shortages in some sectors. While the Reserve Bank is yet to commence raising the Official Cash Rate, fixed rate mortgages continued to climb. The largest increases happening across the longest duration mortgages. The median home buyer using a fixed rate mortgage is now paying $680 more in monthly repayments compared to a year earlier. The rising cost of house prices was also a contributing factor. In Sydney, the median buyer using a three-year fixed rate mortgage is paying an extra $1,031 per month. Despite these pressures, markets are pricing the cash rate to reach 3% by August 2023 and 3.5% by 2024.
In the US, the main economic focus remained on inflation and interest rates. The Fed raised the target rate by 0.25%, as expected, and the median voting member now expects seven hikes this year. Markets are now assessing whether some of these hikes will come in the form of 0.5% increments. An additional four rate rises are predicted for next year, signalling that rate could eventually exceed the Fed’s perceived neutral rate for the US economy of 2.4%. Turning to budgetary matters, the US Congress passed a spending bill to fund the federal government through September 2022 which, combined with last December’s $2.5 trillion increases in the debt ceiling, eliminates the imminent risk of a fiscal crisis.
Elsewhere, the Bank of England (BoE) continued to raise rates as UK annual inflation accelerated to 6.2% in February. Geopolitical risks are expected to slow the pace of rate hikes over coming months. Finally, with Euro-area annual inflation at nearly 6% in February, the European Central Bank (ECB) confirmed that the tapering of the pandemic emergency purchase program will conclude in June and the asset purchase (QE) program will gradually end later this year. Markets are not expecting a rate hike before this time.
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.
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