Financial Market Update24 June 2022
Investment markets continue to navigate a range of challenges
- higher inflation expectations and tighter monetary policy
- rising risks to economic growth and the possibility of recession
- the ongoing Russia-Ukraine conflict
- sharp increases in bond yields have led to significant declines in bond prices.
Super SA’s investment options are invested across a range of assets. Nearly all investable assets have lost value this year, due to extraordinary market conditions. History shows that in times of economic uncertainty we can expect markets to be volatile, however, this shouldn’t necessarily change your long-term investment strategy.
Investment options are not immune to investment market volatility, and Super SA’s uses an asset mix diversified across high quality bonds, property, private equity, and other unlisted assets, to help deliver a smoother return profile for members over the longer term.
Fixed Interest (Bond) markets:
Super SA’s options include investments in Australian and Global bonds (Fixed Interest). Whilst bonds are generally considered to be more defensive than equities, they have detracted from performance recently as bond yields increased sharply resulting in capital losses for these assets.
In June, the selloff across the bond markets continued, driven by the release of the monthly US Consumer Price Inflation report. The report showed higher-than-expected inflation data with the US Federal Reserve responding by aggressively raising interest rates. Indeed, inflation has been on the rise across most developed economies. In Australia, the Reserve Bank of Australia surprised the market with a 0.50% increase in the Official Cash Rate. The market is now pricing an additional 3% of Cash Rate increases by the end of 2022. If realised, this would represent the most aggressive tightening of monetary policy in close to three decades.
The defensive investment options have higher weightings to Fixed Interest. As a result, these options have negative performance for the year. In different market environments it is typically bonds that have smoothed out returns for members. For example, in March 2020, COVID caused sharp declines in equity markets and bonds helped the defensive investment options better hold their value.
The higher-than-expected inflation, and interest rate hikes by major central banks, contributed to significant falls in equity markets. Markets are concerned the combination of rising interest rates and slowing economic growth indicates an increased risk of recession (particularly in the US), along with the risk that central banks may misjudge interest rates increases in efforts to combat rising inflation.
For the Australian market, China’s Zero-COVID policy and ongoing geopolitical risks (particularly in Europe) have also impacted global economic growth expectations along with demand for our resources. All sectors have fallen. Since the market’s peak in April, the ASX 300 is down by approximately 15%.
International markets have experienced similar weakness; global equities (MSCI Global Index) have fallen from their peak in January by approximately -19% (in Australian Dollar terms).
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The information in the article above has been prepared in good faith by Funds SA. However, Funds SA does not warrant the accuracy of the information and to the extent permitted by law, disclaims responsibility for any loss or damage of any nature whatsoever which may be suffered by any person directly or indirectly through relying upon it whether that loss or damage is caused by any fault or negligence of Funds SA or otherwise. The information is not intended to constitute advice and persons should seek professional advice before relying on the information.