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.
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.
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.
WANT TO FIND OUT MORE?
To find out how Perpetual Private can help you manage spending and cash more proactively as well as structure your investment mandates and design your investment portfolios to reflect the values of your NFP, speak with one of our not-for-profit investment specialists on 1800 631 381.