Market Update – equities show moderate gains, fixed income sells off

In markets this week

Equity markets record modest gains

Most global equity markets had positive returns for the second consecutive week, as fears that the Ukraine/Russian conflict will spill over into other countries eased.

In the US, the S&P 500 had a positive return of 1.79% across the week. The Australian S&P/ASX 300 Index had a positive return of 1.56%.

These positive equity market movements helped lift the performance of all our investment options that invest in equity.

However, we expect equity markets to experience ongoing volatility across the coming weeks.

Last week, survey data demonstrated that companies and consumers are starting to feel the impact of the war and the increases in commodity prices, such as fuel.

This will likely impact European markets the most, given their reliance on Russian energy and proximity to the conflict.

Energy prices remain elevated and volatile. The price of crude oil rose by around 10% across the last week after a significant decline in the previous week.

The consumer confidence indicator in the European Union plummeted by 9.4 points across the month to a reading of -19.6 in March 2022, its lowest level since April 2020.

Current measures of consumer confidence in Europe are nearing lows observed at the outbreak of the COVID-19 pandemic. As a result, European equity markets were slightly down across the week.

The future direction of equity markets (particularly in Europe) will likely be influenced by two main actors: how long the conflict will last and how governments will stimulate domestic economies when the war ends.

Fixed income markets

Central banks are anticipated to hike interest rates sooner than previously anticipated. This has caused fixed income markets to start pricing in the expected rate increases. 

In the US, investment banks forecast that the Federal Reserve will increase interest rates by 0.50% across at least two of its next meetings. 

The market is now pricing in a total of 2.06% in US interest rate increases by year’s end. After finishing the previous week at 2.15%, the 10-year yield jumped to 2.49% on Friday — its highest level since May 2019. At the end of 2021, the yield was just 1.51%.

Markets also priced in further increases in UK interest rates in response to year-on-year inflation of 6.2% — the largest increase in prices since 1992. As a result of increases in yields in both the US and UK, fixed income securities sold off significantly across the last week. The global bond index recorded a loss of 1.63%.

While the Reserve Bank of Australia (RBA) continues to indicate domestic interest rates won’t rise in the coming months, fixed income markets have started pricing in expected increases. This is based on the belief that global inflation will force the RBA to move sooner than planned. 

Australian fixed income returns were minus 1.14% across the last week. This is because increases in the market’s expectation of future interest rates push down the current price of bonds.

While negative returns across fixed income markets have caused a drag on the performance of our investment options that have an asset allocation to this asset class, it is not all bad news. 

Higher interest rates decrease fixed income prices across the short term but create the expectation for higher future yields. This means we may experience some short-term pain for longer-term gain.

Russian markets reopens

The Russian stock market reopened to domestic investors across the last week, following a shutdown on 28 February in the wake of Russia’s invasion of Ukraine. 

Russia has been slowly reopening equity trading after other countries imposed a raft of economic sanctions. Despite this, Russian markets remain closed to international investors. 

At the start of the conflict, we announced we would divest from all Russian holdings as markets allow. Russian holdings across the portfolio were negligible, and we have divested most of those positions. Only a small number remain where divestment was impossible due to closed markets. 

Several countries have begun to plan for how economic restrictions will be eased once the Russia-Ukraine conflict ends. This has created some optimism that the economic impact of the current situation will not be permanent.

What this mean for your super

Given the complexity of the conflict and its impact on global prices of goods and services, we believe volatility will persist for some time. 

This means your super balance will likely rise and fall faster than usual in the short term.

The good news is volatility is a normal part of investing, and we manage your super with this in mind.

We plan for and have strategies in place to buffer your super from unexpected market fluctuations caused by global events such as natural disasters or conflict.  

Our focus has and always will be securing solid and consistent long-term returns, so you can get the retirement outcomes you deserve.   

Occasionally this involves riding out short term volatility like we are currently experiencing.  

Get the right advice for your situation

It's natural to feel concerned about heightened volatility and how it affects your retirement savings.

That's why we're here to help.

If you're thinking about switching investment options or are unsure which option is best for you, please get in touch.

You can also book a one-on-one chat with one of our expert Superannuation Advisers. They can offer helpful, straightforward advice to ensure your super is working for your situation.

This service comes at no additional cost – it's part of being a Spirit Super member. To get in touch or book an appointment, call 1800 005 166 or submit an online enquiry.

Important information:

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.