Monthly Market Overview

Returns across all investment options were negative as investment markets continued to navigate a range of challenges.

Key drivers of investment performance during May:

• • Australian Equities were a detractor across all investment options as concerns over economic growth, and the Reserve Bank of Australia (RBA) increasing interest rates to combat inflation, created headwinds for all sectors of the Australian equity market.
  • International Equities were only slightly negative as Energy stocks rallied, partially offsetting negative performance in other areas of the market.
  • Fixed Interest and Inflation-Linked Securities valuations also declined with higher-than-expected inflation data dominating concerns at the beginning of the month.
  • Diversified Strategies Growth offered small positive returns for the growth-oriented investment options.
  • The RBA increased the cash rate 0.25%, from 0.10% to 0.35%. The market is pricing an aggressive tightening cycle with the cash rate currently expected to increase to 3% by the end of the year.
  • At the time of writing, the RBA had increased the cash rate from 0.35% to 0.85% (8 June 2022).
    
    
    

Triple S returns to May 2022

Investment option	1 month %	3 months %	FYTD	1 year %	3 years % p.a.	5 years % p.a.	10 years % p.a.
Cash	0.0	0.0	0.1	0.1	0.4	1.0	1.9
Capital Defensive	-0.7	-3.0	-4.4	-4.0	1.5	2.7	4.1
Conservative	-0.9	-3.0	-4.2	-3.4	3.0	3.9	5.7
Moderate	-1.0	-2.6	-3.1	-1.8	4.4	5.2	7.1
Socially Responsible	-2.2	-2.6	-1.5	1.5	6.7	6.7	8.5
Balanced	-1.3	-2.5	-2.6	-0.6	6.7	6.9	8.8
High Growth	-1.3	-2.2	-1.8	0.3	7.6	8.0	10.4

^{Returns net of fees and gross of tax, based on Super SA unit pricing formula.}

Financial markets

Investment markets continued to be challenged in May as investors navigated:

• 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.

 

Central banks continued to increase rates to combat rising inflation. The RBA raised the cash rate 0.25%, from 0.10% to 0.35%, the first increase since November 2010. Governor Philip Lowe noted the Board agreed it was time to start the process of normalising monetary conditions stating that ‘inflation has picked up more quickly and to a higher level than was expected’. In response, Australian bond yields rose, and the market continued to price in an aggressive tightening cycle with the cash rate expected to increase to 3% by the end of the year.

The market interplay between cash and bond markets has seen bond yields rise. Bonds are generally considered to be more defensive than equities. However, they have detracted from performance recently as bond yields have increased. When bond yields increase, their capital value declines. This occurred because the market expects that central banks will continue to increase cash rates in response to persistent inflation.

The US Federal Reserve also increased rates by 0.50% as expected, with further increases anticipated in the coming months. The US continues to record stronger-than-expected inflation; however, toward the end of the month, the market narrative shifted from inflation to slower growth with speculation about central banks rate increases leading to possible recession.

The impact of higher-than-expected inflation data and central bank rate tightening reverberated through equity markets with the Australian market recording the largest fall at 2.7%. Other major equity markets, while experiencing some intra-month volatility, were mainly flat (although producing negative returns in Australian Dollar terms).  

Europe continues to be challenged by the war in Ukraine with flow-on effects affecting the broader economy. Gas pipelines remain disrupted through Ukraine as Europe embargoed Russian seaborne oil. The resultant elevated energy prices are expected to continue to drive consumer inflation higher.

 

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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.}

^{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.}