Market Update - May
The year so far
Inflation raises the cost of living
In April, Australia’s annual consumer price inflation (the change in the household prices for a basket of common goods and services) was 5.2%, its highest level in 20 years.
Higher inflation increases the cost of living, which means you’ll pay more for everyday items such as groceries, petrol and electricity prices.
Central banks worldwide have started to signal their intent to increase interest. This aims to reduce economic growth by increasing the cost of borrowing and leaving less spending money in consumers’ pockets.
The invasion of Ukraine by Russian military forces has caused uncertainty and fear across the world.
Like you, we have been disturbed and saddened by the ongoing developments. Our thoughts are with the families of all Ukraine and Russian people who are inevitably suffering as this tragedy unfolds.
The key investment impact of the war in Ukraine has been increased food and energy prices.
Russia is a major global supplier of energy products such as oil and gas, coal and copper. These have all increased dramatically in price since the supply began to be limited by the conflict.
Despite an 8% decrease in coal prices across April, the cost remains near its highest in decades. The price of oil had a one-month increase of 2.8%, ending April above $100 per barrel.
With hostilities continuing, we remain attuned to the risks of military escalation, the response of other countries, and the potential for either a refugee or food security crisis across affected nations.
COVID-19 still in play
Despite most countries opening up and learning to live with the pandemic, COVID-19 continues to impact the global economy.Unlike most of the world, China has maintained its zero-tolerance policy, which has led to lockdowns across many major cities following the recent spread of the Omicron variant.
These lockdowns are already impacting the country’s local economy and are likely to have global ramifications, given that Chinese products are key components of many goods worldwide.
Our investment performance for 2022
Despite significant volatility to date, our Pre-Mixed investment options have exceeded their return objective across their minimum suggested return horizon.
The Balanced Option (our default option) has exceeded its objective by 2.08% per annum across the last seven years.
|Return across minimum suggested timeframe 1
|CPI + 1%
|CPI + 2%
|CPI + 3%
|CPI + 3%
|CPI + 4%
Note: April 2022 are based on the ‘soft close’ unit price for each option
Past performance is not a reliable indicator of future performance.
In markets this month
Equity markets have been highly volatile in 2022, which has resulted in largely negative returns.
Across April, the Australian ASX300 Index returned minus 2.4%, while the U.S. S&P500 Index (which contains a larger number of interest-rate-sensitive technology stocks) returned minus 9.1%.
The Chinese equity market felt the impact of more COVID-19 lockdowns and continued political uncertainty, falling by 4.9% across the month of April and taking its year-to-date returns to minus 19.1%.
European equity markets have continued to be affected by the fallout of the conflict in Ukraine, declining 2.6% across the month of April and a return of minus 17.4% since the start of the year.
Fixed Interest Markets (Bonds)
Given recent inflation and interest rate rises, bonds face unfavourable conditions.
Bonds pay investors a fixed rate of income based on the market interest rate (also referred to as the ‘yield’) when they are issued to the market. While bond markets are often seen as a “safe-haven” asset class, they are still subject to interest rate risks.
When interest rates increase, the value of bonds decreases, and global interest rates have surged across the last two months.
The interest rate on Australian 10-year government bonds increased from 1.676% at the start of 2022 to 3.178% at the end of April.
Similarly, US 10-year government bond yields increased from 1.51% at the start of January to 2.94% by the end of April.
Unsurprisingly, bond returns have been quite negative across the year, affecting all investment options with an exposure to the Fixed Interest asset class.
The Australian Fixed Interest index returned minus 0.2% across the month, bringing its calendar-year-to-date return to minus 9.1%. The global Fixed Interest index returned minus 0.6% across the month, bringing its calendar-year-to-date return to minus 9.5%.
However, newly issued bonds do provide investors with higher income levels.
Once interest rates stabilise, bonds are expected to provide high returns due to this increased income. Returns in the Fixed Interest asset class should also be less volatile by then.
We invest across many international markets. When assets are priced in a foreign currency, their returns depend on: the local currency return of the asset and the change in the value of the Australian dollar.
As such, foreign currency assets become more valuable when the Australian dollar declines.
The Australian dollar (AUD) has been quite volatile across the first four months of 2022.
At the start of the year, $1 AUD could buy $0.73 U.S. dollars (USD). By early April, it had gone up to $0.76 US before dropping to $0.70 US at the end of the month.
More than half of our foreign currency exposure is to the USD, and this decline in the exchange rate across April has benefited those US-denominated assets.
The AUD has also moderately depreciated against the Euro, British Pound and Japanese Yen across April. However, the value of the AUD relative to each of these currencies remains higher than at the start of the year.
The appreciation of the AUD has been a headwind for investment returns of assets denominated in these currencies.
Private markets assets, such as property and infrastructure, are repriced based on expert valuations as opposed to short-term market forces. These asset classes have not been exposed to the same level of volatility as listed markets, such as equities and fixed interest.
Increasing interest rates are expected to reduce the value of these asset classes. However, these decreases may be offset (in part at least) by increased income. Property and infrastructure assets often have inflation-linked contracts, which means the income that investors receive increases year-to-year in line with inflation.
Across April, the value of both the listed property and infrastructure indexes increased by 1% and 3.7%, respectively. These indexes track the value of funds comprising property and infrastructure assets respectively that trade on global equity markets.
1 Past performance isn’t a reliable indicator of future performance. The value of investments can rise or fall, and investment returns can be positive or negative.
This article is for general information only and doesn’t take into account your objectives, financial situation or needs. You should assess your financial position, personal objectives and needs before making a decision based on this information.