Weekly Market Update – 31 January 2022

Volatility spikes and quality outperforms.

Whilst we had been expecting equity markets to pause or indeed weaken at some stage, the manner in which markets sold off last week perhaps took most by surprise.

Volatility was once again the flavour of the week spiking to levels not seen since November 2020. Ultimately the escalation in market volatility led investors to rotate out of risk assets into the perceived safety of government bonds.

There were a range of catalysts for last week’s market drawdown which saw the MSCI World Index fall -2.3% (rallied +2.2% in AUD terms given a weaker AUD which fell -2.7%). Federal Reserve commentary on interest rates, inflation data in Australia, Ukraine/Russia political tensions and Omicron uncertainty all combined to unsettle global markets.

The rapid nature of last week’s selloff certainly had shades of ‘March 2020’ about it, in that investors reduced exposures first and asked questions later. We believe volatility will play a much greater role in 2022 as monetary policy tightens and purchases of government assets are unwound.

But that does not mean opportunities to achieve outsized market returns won’t be present. The PRIME Australian Equity Growth SMA benefitted from this volatility last week outperforming the benchmark by +0.75% albeit in a down market. Given the portfolio’s ‘quality’ approach and focus on strong balance sheets and robust earnings, the portfolio tends to benefit when volatility picks up and investors rotate back into blue chips.

The events of the last week or fortnight serve as a poignant reminder that investing and wealth creation should always be viewed in the long-term. As Warren Buffett frequently says, never have an opinion about ‘the market’ because it might interfere with opinions you have about good, attractive businesses and it would be foolish not to act because of some prediction or market forecast.

We follow the mantra “time in the markets beats timing the market” and there were many economists and investment experts who recommended their clients sell down exposures in March 2020 only to miss out on much of the 30% upside that followed.

There may be instances throughout the year where we recommend becoming more defensive and there may be instances where we increase equity exposures.

Fundamentally though we have high conviction in our ‘quality’ approach and recommend all investors remember their long-term objectives and investment goals.

Stay the course.

A hawkish Federal Reserve

The Federal Reserve failed to display any dovish tones at is FOMC, instead opting for a hawkish tilt.

This marks a transition in the Fed’s thinking from easy monetary policy due to macro and Covid risks and the fact that they believed inflation was transitory and that employment was less than full to erring on the hawkish side because inflation risks are not transitory and thus need to be addressed.

So, moving forward the risks are that the Fed will remain more hawkish than markets think, rather than the opposite.

Given the Fed’s hawkish bias and given monetary conditions are currently very accommodative, such a stance is inconsistent with the Fed’s new rhetoric. Rates are still at zero, QE is ongoing, and the size of the Fed balance sheet is still near 9 trillion.

Thus, it was unsurprising to see the Fed state that it needs to move to monetary tightness, not just monetary neutrality, in order to reduce inflation risks going forward.

Interest rate rises are imminent with inflation’s persistence alongside full employment justifying a tightening in policy conditions.

The key phrase in Chairman Jay Powell’s commentary was “plenty of room for hikes”.

Whilst March now looks likely to kickstart the increase in rates in the US, there is also the strong possibility that rate rises (which had only a few months ago been priced in at 3-4x in 2022) occur upwards of 5x throughout the 2022 year.

Additionally, we think it is entirely plausible that the Fed commences quantitative tightening (QT) and balance sheet reduction in April-June given its policy shift to ‘tightening’.

The impact of a more hawkish Federal Reserve for markets saw equities sell off whilst Treasury yields rallied at both the front end and back end of the curve and the USD climbed back towards its December highs.

Inflation overshoots

Inflation data released last week came in ahead of expectations with Q4 CPI recording 1.3%, ahead of forecasts of 1%.

Households fared worst with non-discretionary inflation (food, petrol, housing, and health costs) climbing +4.5% last year.

Increases in new dwellings (+4.2%) and petrol prices (+6.6%) were the main drivers in Q4 with global supply chain disruptions and shortages, combined with rising freight costs and high demand, contributing to price increases across a wide range of goods including dwelling construction materials and motor vehicles.

On an annualised basis, headline inflation spiked to 3.5% (exceeding forecasts of 3.2%) and underlying inflation (the RBA’s preferred measure) which strips out some of the more volatile items measured in the headline number recorded 2.6%.

The RBA had not expected core inflation would reach 2.5% until 2023 and this was one of the main motivations behind the RBA not planning to hike rates this year.

This has now proven to be wrong and similarly with inflation data overshooting in the US (7% annualised to December), central bank intervention is coming.

The general consensus is now that the RBA will call an end to its bond purchasing (QE) program when it meets tomorrow, and we would expect interest rates to rise in H2.

ASX Weekly Wrap

Having endured 3 wildly volatile negative days (market was closed for Australia Day), the ASX200 rebounded +2.2% on Friday to head into the weekend with a little bit of momentum.

As to be expected in a risk-off environment, small caps (-4.2%) and mid-caps (-5.2%) fared worst last week. Investors displayed a clear bias for high quality large caps (-2.6%) with strong free cash flows and solid balance sheets.

Consumer staples were the best performing sector flat on the week. The defensive-like characteristics of staples tend to provide investors with a slightly higher degree of or conviction when markets become more volatile.

Energy also outperformed falling -1.8% after oil prices rallied for a sixth consecutive week. Oil prices continue to rise on fears the Russia-Ukraine conflict could disrupt energy supply to Europe.

Tech stocks were the worst performing sector falling around -8% in what was one of the worst weekly performances for the sector since May last year. A hawkish Federal Reserve was the major catalyst here – rising rates represent a headwind for tech whose future cash flows are discounted as rates rise and who traditionally run a more highly leveraged balance sheet.

Rio Tinto (RIO) was one of the best performing large cap stocks on the market last week rising +4.8% after reaching an agreement with the Mongolian government for its Oyu Tolgoi mining operation.

The agreement saw the Oyu Tolgoi board which is wholly owned by the Mongolian government unanimously approve the commencement of underground operations which will expedite production which is expected to be delivered in 1H 2023.

From a portfolio perspective BHP was the best performer rising +2.7% on the back of gains in the iron ore price (+1.9%).

This also follows BHP’s Q2 update released two week’s ago which showed iron ore volumes were +1% higher compared to the prior corresponding period due to increased ore car availability and the ramp up of production of its South Flank mine in Western Australia’s Pilbara region.

One of the few negatives delivered in BHP’s impressive update was the weakness seen across its copper division. Copper production was -12% lower with reduced volumes at its South Australian mine, Olympic Dam.

Dragging on portfolio performance was once again Northern Star (NST) which fell -14%. Hawkish commentary from the Federal Reserve weighed on the gold price.

Whilst gold is traditionally considered a safe haven asset and doesn’t pay a yield it is generally regarded as a store of wealth. This means rising rates negatively impact gold bullion which ultimately flows through to the bottom line of gold miners.

We believe NST is capable of outperforming if markets continue to trade through bouts of volatility and given its pristine balance sheet and market position we remain confident in the longer term outcome.

Looking ahead

Monday 31st January 2022 – Friday 4th February 2022

  • Monday: AU Private Sector Credit (DEC)
  • Tuesday: AU RBA Interest Rate Decision, UK BoE Consumer Credit (DEC)
  • Wednesday: US ISM Manufacturing PMI (JAN)
  • Thursday: AU Balance of Trade (DEC), UK BoE Interest Rate Decision, US Weekly Jobless Claims
  • Friday: US Non-Farm Payrolls (JAN)

Friday 28th January, 5pm values

All Ordinaries 7266-224-3.0%
S&P / ASX 2006988-188 -2.6%
Property Trust Index1565-34 -2.1%
Utilities Index6866-35 -0.5%
Financials Index6224-132-2.1%
Materials Index16947-608-3.5%

Friday 28th January, closing values

U.S. S&P 5004432+34+0.8%
London’s FTSE7466-28-0.4%
Japan’s Nikkei26717-805-2.9%
Hang Seng23550-1416-5.7%
China’s Shanghai3361-162-4.6%

Key dividends

Monday 31st January 2022 – Friday 4th February 2022

  • Monday: Div Ex-Date – Metrics Income Opportunities Fund (MOT),
    Metrics Master Income Trust (MXT)
  • Tuesday: Div Ex-Date – Legg Mason Australian Bond Fund (BNDS)
  • Wednesday: Div Ex-Date – Djerriwarrh Investments Limited (DJW),
    Nickel Mines (NIC)
  • Thurday: Div Ex-Date – N/A
  • Friday: Div Pay-Date – Select Harvests Limited (SHV)


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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