Quarterly investment update – why back to normal is good for income investors

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Perpetual Private Insights

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The June 2022 Perpetual Private Quarterly Market Update looks at how markets and economies shifted over the past quarter and what that means for the different asset classes – including income-producing assets like bonds, cash and alternatives. You can download the full report – or read our concise review below. 

Download the report

June Quarter 2022: What happened? 

  • After avoiding the worst of the increasing inflation, leading to rising rates and the subsequent selloff in most assets during the previous quarter, Australian Equities played catch-up with the rest of the world – dropping over 12%. 
  • Global shares lost nearly 8% over the period and are now down 15% for the first 6 months of 2022. 
  • Global bond markets, traditionally a safe haven, were instead storm-tossed – down over 9% over the past two quarters. 
  • Around the globe and here at home, rising rates brought listed property back to earth – down 17% in Australia and 9% for global indices.

(Indices referenced: S&P/ASX 300 index , S&P/ASX 300 Utilities (Sector) - Total Return, S&P/ASX 300 Energy (Sector) - Total Return S&P/ASX 300 Information Technology (Sector) - Total Return, MSCI AC World Index - Net Return. S&P/ASX 300 A-REIT (Sector) - Total Return index, MSCI World / Specialized REITs -SUB - Net Return index, Bloomberg Global Aggregate (AUD Hedge). All performance numbers for June  quarter unless otherwise stated).

Post-traumatic inflation disorder 

In opening every available cash spigot to offset the economic trauma of the Great Lockdown, central banks and governments around the world set inflation running. There was debate about how transitory that inflation would be but it’s now clearly in danger of becoming embedded. So central banks are turning off the taps. In many cases the imperative to do so is baked into their charters and most are signed up to the view of the Bank of International Settlements (BIS): “As historical experience has shown time and again, the long-term costs of allowing inflation to become entrenched far outweigh the short-term ones of bringing it under control.[1]

By raising rates – sometimes dramatically – central banks are trying to reduce the excess demand that’s driving inflation in the global economy. Their balancing act – between crushing inflation and crushing growth - is complicated by China’s zero-Covid policies and the war in Ukraine, which the BIS called, “Probably the most significant geopolitical event since the fall of the Iron Curtain.”

Finding income in different places

Andrew Garrett, Investment Director at Perpetual Private points out that a world where interest rates are no longer set to ‘emergency’ is not something to fear – it’s a return to normal. In this he’s joined by the Governor of the Reserve Bank, Philip Lowe, who announced his recent 0.50% rate rise by noting, “Today's increase in interest rates is a further step in the withdrawal of the extraordinary monetary support that was put in place to help insure the Australian economy against the worst possible effects of the pandemic” (our italics). 

So what does monetary policy normalisation mean for income investors? The good news for those relying on income from portfolios or trusts is that some old patterns are reasserting themselves. 

When rates were artificially forced to ever-lower lows to manage a GFC or offset lockdowns, many income investors had to go ‘up the risk curve’ and buy Australian shares to generate a decent income. Now that monetary policy is moving back to a more normal setting, the rates on government bonds and corporate fixed-income securities are rising. 

That means income investors can turn back to less volatile assets to generate the income that pays their bills. As Andrew Garret says, “the load of creating income is now being shared more evenly across the different asset classes – and that’s a more robust environment for income investors.”

Now isn’t always

The other good news for investors – all investors - is what you might call the self-correcting mechanism. Much of the inflation we’re facing is driven by supply chain issues which are slowly starting to ease. That easing will be helped if, as expected, China finds a way to fight Covid that doesn’t mean shuttering whole cities. That trend – and any stabilisation in Ukraine - could ease inflation pressures and let central banks take their foot off the brakes in 2023. 

That doesn’t mean a return to ultra-low rates – which probably aren’t desirable anyway – but it does mean investors won’t be leaning against the Fed (and other central banks). And that makes making money a lot easier. 

Perpetual Private’s Quarterly Investment Update for March to June 2022 features a big picture overview of economic and market trends and the outlook for individual asset classes including equities, fixed income, real estate, currency and alternatives.

Download the report



[1] Sometimes called the "Central Banks’ Central Bank" – see www.bis.org/publ/arpdf/ar2022e_ov.htm 



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Perpetual Private advice and services are provided by Perpetual Trustee Company Limited (PTCo) ABN 42 000 001 007, AFSL 236643. This information was prepared by PTCo and Perpetual Investment Management Limited (PIML) ABN 1800 866 535, AFSL 234426 and is used by PTCo. It contains general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable for your circumstances. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The information is believed to be accurate at the time of compilation and is provided in good faith. PTCo do not warrant the accuracy or completeness of any information contributed by a third party. Any views expressed in this article are opinions of the author at the time of writing and do not constitute a recommendation to act. This information, including any assumptions and conclusions is not intended to be a comprehensive statement of relevant practise or law that is often complex and can change. No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital. Past performance is not indicative of future performance.