Weekly Market Update – 24 January 2022

Increased volatility in 2022 as interest rates are set to rise.

Welcome back to the first edition of the 2022 Prime Weekly Market Update. We hope you all enjoyed your respective breaks over the holiday season and are gearing up for another busy year.

Whilst every year is always a “big year” we are predicting 2022 will prove to be a crucial one. Interest rate hikes will be delivered in the US (first time since 2018), the Federal Reserve will unwind its balance sheet, the RBA may pivot on its policy stance and deliver a rate hike in H2 and there is a Federal Election due. Not to mention the ongoing impacts of COVID on the global economy.

It will be busy.

Holiday Recap

As to be expected, investment markets were somewhat muted over the December/January period.

The main data points to impact markets were US inflation figures and the Federal Reserve’s December FOMC minutes.

From an inflation standpoint, confirmation that it indeed can no longer be considered transitory came through in the form of a 7% annual figure (core inflation was 5.5%) through to December. This is now the seventh consecutive month where annual inflation has exceeded 5% – well above the Federal Reserve’s desired target.

Price increases in housing and accommodation were the biggest drivers, whilst the cost of food also ticked higher. Covid uncertainty and the spread of the latest variant Omicron also drove prices higher with impacts to supply chains causing shortages in supply.

Interestingly, swap markets are now pricing in more than 25bps of rate hikes in March with a growing number of investors believing the Fed may hike beyond mainstream expectations. We believe the consensus view that a 25bps rate hike is more likely, particularly given the Federal Reserve’s preference for slow and systematic rate rises.

December’s FOMC minutes were meaningful and an important guide for investors highlighting the Fed’s discussions around not just tapering quantitative easing (QE) but unwinding the balance sheet thereby raising the possibility of quantitative tightening (QT).

This indicates that the Federal Reserve will do a U-turn in H1 switching from an expansionary balance sheet to a contractionary one. Whilst QE has fuelled rising asset prices, QT will reduce liquidity in financial markets and will place more pressure on asset prices going forward.

Notwithstanding the more challenging macroeconomic environment that lies ahead, we believe high quality international fund managers with strong track records of outperformance and lower levels of volatility can continue to perform well. We recently added the Hyperion Global Growth Fund, Munro Global Growth Fund and the Aoris International Fund to the Prime International SMA.

Global equity markets struggled in a risk-off environment last week with the MSCI World Index falling -4.2% in AUD terms.

Outlook for global equities for 2022

Whilst the outlook for equity market returns in 2022 will undoubtedly be constrained by quantitative tightening and interest rate hikes, we firmly believe a high quality, well diversified portfolio will withstand further bouts of market volatility.

However, it is important to highlight the equity market returns of 2021 will unlikely be matched in the current year.

Corporate earnings and investor optimism has been spurred on by both fiscal support and accommodative monetary policy. Increased flows of capital into financial markets provided a strong backdrop for investor returns in 2021 with the MSCI World Index climbing +30% in AUD terms.

The withdrawal of support from both central banks and governments in 2022 is required and we have already made the case for why we believe it should have occurred sooner. Central banks have globally held to the wrong transitory view on inflation for too long, such that inflation is now far higher than they could have expected.

A deceleration in global Purchasing Manager Indices (PMIs – the diffusion index that summarises whether market conditions are expanding or contracting in the manufacturing and service sectors) will eventually cause inflation to peak, however, we believe this is unlikely to occur until Q2.

Rising wages and costs of living (rent and food) coupled with ongoing disruptions to supply chains will continue to drive inflation higher in the short term. This should imply rising yields in Q1 followed by a peak in yields in Q2.

Finally, Federal Reserve rate hikes, quantitative tightening and peaking PMIs are all bullish USD factors supporting our thesis that the US Dollar will likely outperform other major currencies.

Australian Consumer Sentiment

Consumer sentiment is typically quite strong in January. This is because January is generally a period of the year where consumers tend to be more upbeat and have more confidence in economic activity.

The Westpac Consumer Sentiment Index fell -2% in January which was surprisingly ahead of forecasts.

Due to the rapid spread of the Omicron COVID variant over the December period, expectations had been for a greater deterioration in underlying confidence.

However, consumers reported a significant improvement in their finances relative to a year ago likely reflecting a combination of improving incomes (labour markets have rebounded) and an accumulation of cash reserves which have seen savings rates increase on the back of lockdowns over the past two years.

Notable weakness was observed in the sub-index ‘economic conditions in the next 12 months’ which fell almost -10%. The possibility of the RBA hiking interest rates was the major catalyst for this decline.

Interest rates are also starting to impact consumer assessments of the housing market outlook with consumers becoming less bullish on the outlook for house prices. House price expectations index fell -4.8% in January, its lowest level since November 2020. That said, most Australians still expect house prices to rise over the next year.

ASX Weekly Wrap

A brutal selloff on Friday (-2.3%) dragged on the overall performance of the ASX200 but the index still managed to outperform the global benchmark falling -3% last week.

Mid-caps (-3.4%) underperformed whilst small caps fell -3.1%. Large caps fell broadly in line with the wider market, down -2.9% over the course of the week.

The best performing sector was energy which fell -0.2% in what was otherwise a disappointing week for all sectors.

Energy stocks benefitted from a rally in oil prices. WTI and Brent Oil rallied +2.2% and 1.8% respectively to trade at a multi-year highs.

Iron ore continued to rally higher on the back of increased demand and some supply-side issues impacting Brazilian miner Vale. Iron ore rose +1.5% last week to trade US$129/tonne.

Healthcare, financials, and tech stocks were the worst performing sectors falling around -4% in what was the worst weekly performance for the ASX200 since October 2020.

At a stock level, HUB24 (HUB) was the best large cap performer climbing +8% after its Q2 update showed record platform inflows of $3.6b which drove total funds under administration to $68b – more than double its
prior corresponding period.

From a portfolio perspective Northern Star (NST) was the best performer rising close to +6% after releasing its Q2 update to the market last Thursday. NST announced it was on track to meet its FY22 guidance of 1.55m-1.65m ounces of gold.

NST’s balance sheet remains healthy with $774m in liquidity which excludes approximately $700m in undrawn available facilities. NST remains a key ‘defensive’ portfolio exposure in the PRIME Australian Growth SMA and one we think can outperform if markets become increasingly volatile.

Looking ahead

Monday 24th January 2022 – Friday 28th January 2022

  • Monday: AU Markit Composite PMI Flash (JAN), UK Markit Composite
    PMI Flash (JAN)
  • Tuesday: AU NAB Business Confidence (DEC), Inflation Rate (Q4), US
    Markit Composite PMI Flash (JAN)
  • Wednesday: Australia Day
  • Thursday: AU Import/Export Prices (Q4), US New Home Sales (DEC),
    GDP Growth Rate (Q4)
  • Friday: US Personal Spending (DEC)

Friday 21st January, 5pm values

 IndexChange%
All Ordinaries 7490-227-2.9%
S&P / ASX 2007176-218 -2.9%
Property Trust Index1599-50 -3.0%
Utilities Index6901-172 -2.4%
Financials Index6356-236-3.6%
Materials Index17555-368-2.1%

Friday 21st January, closing values

 IndexChange%
U.S. S&P 5004398-265-5.7%
London’s FTSE7494-49-0.6%
Japan’s Nikkei27522-602-2.1%
Hang Seng24966+583+2.4%
China’s Shanghai3523+2+0.1%

Key dividends

Monday 24th January 2022 – Friday 28th January 2022

  • Monday: Div Pay-Date – VanEck Subordinated Debt ETF (SUBD)
  • Tuesday: Div Ex-Date – N/A, Div Pay-Date – N/A
  • Wednesday: Div Ex-Date – N/A, Div Pay-Date – N/A
  • Thurday: Div Pay-Date – Premier Investments Limited (PMV)
  • Friday: Div Ex-Date – BOQPE (BOQPE), BOQPF (BOQPF) Div Pay-Date –
    Metcash Limited (MTS), Vanguard US Total Market (VTS)

Contact

Mark Johnson – Chairman of Investment Committee(03) 8825 4738
Guy Silbert – Investment Manager(03) 8825 4750

If you would like to discuss your situation, please speak to your adviser or email clientservices@primefinancial.com.au

Mark JohnsonT: (03) 8825 4738Michelle BromleyT: (03) 8825 4751
Livio Caiolfa T: (03) 8825 4748Nicole LewisT: (03) 8825 4734
Marcus AingerT: (02) 9134 6292Nicholas Miller T: (03) 8825 4722
Dylan CresswellT: (03) 8825 4707Gina McIntoshT: (07) 3557 2557
Jarrod Rodda T: (03) 8825 4729

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

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