What changing investment dynamics mean for Trust beneficiaries


Perpetual Private Insights

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With war in Eastern Europe, inflation and interest rates on the rise and Covid surging in China, investment markets faced a rising tide of volatility in the past quarter. 

The March 2022 Perpetual Private Quarterly Market Update looks at what happened and what that might tell us about the future. You can download the full report – or read our concise review of what it all means for Trust beneficiaries below. 

Download the report


March Quarter 2022: The numbers

  • Australian shares performed solidly with the S&P ASX 300 up 2.1%. By global standards inflation and interest rates are still low in Australia and as a resource economy we benefited from commodity price rises. The Energy sector posted 28% quarterly returns.
  • International Equities were hammered by war in Ukraine, with European shares particularly hard-hit.
  • Australian listed real estate retreated as even the threat of rising rates are negative for property stocks. However, performance over the past year has been stellar.
  • Local and global bonds suffered from the rising rate environment. Both were down close to 6% over the quarter. 


What's influencing the outlook?

Ukraine and China

The cruelty of Russia’s ‘special military operation’ has shaken the world but history tells us war does not always derail investment markets. There are more specific Ukraine-related forces at play that are influencing markets. Sanction on Russia mean higher energy prices. That’s a major economic blow because they suck from cash consumers’ pockets. The loss of Ukraine’s harvests will add to food costs.

Somewhat lost in the fog of war is another Chinese Covid crisis – as we write there are over 20 million people locked down in Shanghai as Chinese rulers stick to a futile zero-Covid policy. That has implications for industrial production, keeps the pressure on global supply chains and curtails Chinese consumer confidence and spending.

Inflation and interest rates

For investors today, inflation and interest rates are the terrible twins: inseparable and inexorably influencing investment assets. Hopes that supply chain pressures would ease as the world bounced back from Covid have been dashed by the invasion of Ukraine and China’s new lockdowns. Inflation is now at rates unthinkable a year ago – 7.9% in the US, 6.2% in the UK, 7.5% in the Euro area. And around the world – except Australia – rates have started to rise in response. There are more rises to come, with the US response stretching to a potential seven more rates hikes.

Trust beneficiaries – they giveth and they taketh away 

For Trust beneficiaries who rely heavily on the income they generate from their portfolios, the recent shift in market dynamics brings a new challenge and some good news. 

Higher rates can crimp the returns from the share part of their portfolios, cutting into capital growth and dividend payouts. Conversely, as interest rates rise, bonds and term deposits could once again play their traditional role of providing low-risk income. 

The investment team at Perpetual Private have been shaping the portfolio to manage these challenges. One significant move was a lower allocation to fixed-maturity government bonds at the end of 2021 as the pressure for higher interest rates started to grow. At the beginning of a rising rate cycle, bonds lose value (because their fixed lower rates are less attractive). By switching into floating rate credit securities, Perpetual Private was able to capture the upside of higher income flows – without the downside of capital losses. 

What we’re watching – inversion therapy

During the quarter US rates ‘inverted’, that is, rates on short-term bonds pushed above those on longer-dated securities. That’s unusual – and has often been an indicator of coming recession. It’s something Perpetual Private’s investment team is keeping a close eye on. 

A switch to value

According to Andrew Garrett, Investment Director at Perpetual Private, markets are now dealing with geopolitical risks and inflation pressures they haven’t heard for over a decade. Yet while Perpetual Private does expect higher volatility and lower overall returns, that doesn’t mean well-diversified portfolios can’t deliver solid results for Trust beneficiaries. Instead, a more nuanced market environment places a premium on specific investment skills.

“The long-running, low-rate environment that’s just ended pumped up all investment markets,” says Andrew. “To use a Buffetism, it lifted all boats.”

By contrast, a rising-rate environment is one where active investors with a nose for quality can do well – across the whole range of asset classes. 

Perpetual Private’s quarterly investment update for January to March 2022 covers these issues in greater depth, with detailed analysis of individual asset classes including equities, fixed income, real estate, currency and alternatives.

Download the report

[1] https://tradingeconomics.com/country-list/inflation-rate


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.

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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.