Weekly Market Update – 20 June 2022

Equity markets selloff as amid rising inflationary concerns

Equity markets sold off heavily last week in response to a headline US inflation figure of 8.6% that was released the previous Friday.

Global equity markets have not seen such weakness since the onset of the COVID-19 pandemic in Q1 2020. The unexpected inflation print saw investors rotate to safe haven assets (gold +0.4%) as fears further peaks in inflation are likely.

The pessimistic outlook and investor caution led to the MSCI World Index falling -3.9% in AUD terms. A weaker AUD (-2%) softened the blow somewhat given the MSCI World Index fell -5.9% in USD terms.

Meanwhile the Federal Reserve hiked US interest rates by 75bps in an attempt to combat rising inflationary pressures and are expected to do the same at July’s FOMC meeting in 5 weeks’ time. Current estimates indicate a 3.25% cash rate by year’s end.

Locally, Australia’s employment data rebounded strongly in May with over 60,000 jobs created, driving a 3.9% unemployment rate. Full time employment surged by upwards of 69,000 jobs which offset a contraction of 8700 jobs in part-time work. Pleasingly, this saw the underemployment rate (those currently working but seeking additional hours) fall to 5.7% from 6.1%.

The surprisingly strong employment data which was released one day after the Fair Work Commission increased the minimum wage by 5.2% has further fuelled investor bets that the RBA will hike rates by 1% over the next two board meetings.

Inflation Persisting

The recent US headline inflation print of 8.6% was salt in the wound for “team transitory.” None of the 51 strategists and economists that submitted to Bloomberg predicted such a number. Consensus was 8.3% – with four of the 51 predicting the high-side of estimates being 8.5%

Unsurprisingly, bond yields in the US have soared in the days to follow, with the two-year yield recording a +37bps day to close at 3.2% last Monday. Two-year yields have not risen by this much in a single day since June 2009.

The long end which refers to longer duration bonds (i.e the 10-year US Treasury) outperformed but was also hit, despite the implications for growth. The 10-year yield closed +21bps higher over the course of the week and now yields 3.23% breaking 2018 highs of ~3.20%.

Perhaps adding to this problem was a tri-party announcement from Japan’s Ministry of Finance, the Bank of Japan (BoJ), and the Financial Services Agency that they plan to intervene in currency markets to protect the Yen, which is down ~15% YoY (year-over-year). But with no rate rise in sight, the BoJ may be forced to sell foreign assets – including huge swaths of US and Australian government bonds.

Locally, the RBA recently surprised by hiking rates 50bps to 0.85% and this has seen the 3-month BBSW (Bank Bill Swap Rates are credit-based interest rate benchmarks used by banks to issue short-term bank paper) surpass 1.50% for the first time since the start of 2019.

This is a positive for ASX bank hybrid investors with reference rate assets and distributions often priced on the 3-month BBSW. This means incomes and running yields will be significantly higher going forward.

Such benefit is set to continue, with September 2022 forward yields pricing in a 2.85% rate for 3m BBSW.

On the back of rising yields, we believe fixed income as an asset class is becoming a more attractive value proposition than it has been in recent years.

Market Volatility

(source – Libby Newman, Investment Specialist – Strategy and Research, Vanguard Australia)

Nearly everywhere you turn, from friends and colleagues to news channels, you can find someone with a strong opinion about the financial markets. At the moment, it seems that the news on so many fronts is bad with skyrocketing energy costs and both equity and bond markets down significantly since the start of the calendar year.

While investing in the stock market is typically a prudent choice for investors seeking long-term growth, sharp drops can still be hard to stomach. Below are some things to keep in mind if a market tumble makes you feel the need to “do something” which might shut you out of the strong recoveries that have historically followed market downturns.

Downturns aren’t rare events

Typical investors, in all markets, will endure many of them during their lifetime. Since 1980 there have been 9 bear markets (declines of 20% or more lasting at least two months).

There has been a lot of focus on the transition to a bear market (with the line in the sand of a 20% decline having been triggered by the US S&P 500 index in mid-June 2022). This is the same market that delivered returns of 36% for the year ended December 2021 (currency adjusted), and even with a 20% decline at the onset of the Covid pandemic, recorded 7.3% for the year ended December 2020 (currency adjusted).

It is important to keep in context that in spite of several bear markets, the market has also continued to trend higher over the long term. Not all financial market declines are the same in length or severity. For example, historically speaking, the GFC of 2008-2009 was an extreme anomaly. As challenging as that event was, it was followed by one the longest stock market recoveries in history.

The Australian equity market (which admittedly recorded a more modest, but still very respectable 17.5% for the year ended December 2021), has held up relatively well, posting a decline of 11% (so not yet in bear territory).

Dramatic market losses can sting, but it’s important to keep a long-term perspective and stay invested in order to participate in the recoveries that typically follow.

Some bear markets since 1980 have been sharp, but many bull market surges have been even more dramatic, and often longer, leaving stock investors well compensated over the long term for the risk they took on.

But such action would shut you out of the strong recoveries that have historically followed market downturns. The answer is to come up with a game plan before the next market pullback, so you’re well positioned to try to take advantage of the opportunities that follow.

What’s more, you’ll probably know what to expect as markets cycle through their phases, so you can tune out messages that don’t help your strategy.

The best defence: Making a plan and sticking to it

By focusing on the factors of your investing strategy we can control (including things such as asset allocation and costs) and not worrying about those things out of our control, such as downturns in the markets and economy, you can prepare your portfolio for the financial market shocks.

Remember that bearish market conditions—while inevitable—don’t last forever. As a savvy investor, you can ignore short-term pullbacks of the market (and any commentary that might cause you to veer off course) and remain committed to achieving your long-term vision.

Downturns come and go. The results of a well-designed and faithfully followed plan, on the other hand, can serve you the rest of your life.

ASX Weekly Wrap

The ASX200 under/outperformed the global benchmark falling -6.6% last week.

The selling was broad-based with tech stocks faring worst, down -9.8%. Energy stocks which have been the best performing sector year to date rising +28% were marked down -8%.

Iron ore fell close to -12% and this ultimately led to miners falling around -7% over the course of the week.

There was little respite in what was a horrendous week for equity market investors, but staples and telcos outperformed falling -3% and -2.4% respectively.

We have been vocal in our view that staples is a sector well leveraged to a high inflationary environment given the ease with which costs can be passed through to the end consumer. The PRIME Australian Equity Growth SMA is currently overweight the sector with Woolworths (WOW) the main exposure.

The Quality nature of the Prime Australian Equity Growth SMA tends to mean in risk-off, volatile markets, the quality of the portfolio’s underlying positions shines through. Whilst it is never nice to see markets drawdown like they did last week, it was pleasing to see the portfolio’s quality bias capture some outperformance on the downside.

We are tracking along nicely relative to benchmark month to date for June so fingers crossed we can finish off the financial year strongly.

Looking ahead

Monday 20th June 2022 – Friday 24th June 2022

  • Monday: AU RBA Governor Lowe Speech, CN Loan Prime Rate
  • Tuesday: AU RBA Meeting Minutes, US Chicago Fed National Activity Index (MAY)
  • Wednesday: AU Westpac Leading Index (MAY), UK Inflation Rate (MAY), US Existing Home Sales (MAY)
  • Thursday: AU S&P Global Manufacturing & Services PMI (JUN), US Weekly Jobless Claims 
  • Friday: UK Retail Sales (MAY)

Friday 17th June, 5pm values

 IndexChange%
All Ordinaries 6663-482-6.7%
S&P / ASX 2006475-457-6.6%
Property Trust Index1284-72-5.3%
Utilities Index7583-354-4.5%
Financials Index5549-411-6.9%
Materials Index16443-1367-7.7%

Friday 17th June, closing values

 IndexChange%
U.S. S&P 5004108-50-1.2%
London’s FTSE7533-52-0.7%
Japan’s Nikkei27762+980+3.7%
Hang Seng21082+385+1.9%
China’s Shanghai3195+65+2.1%

Key dividends

Monday 20th June 2022 – Friday 24th June 2022

  • Monday: Div Pay-Date – ANZPG (ANZPG), ANZPH (ANZPH), ANZPI (ANZPI), ANZPJ (ANZPJ), MQGPE (MQGPE), NABPE (NABPE), WBCPI (WBCPI)
  • Tuesday: Div Ex-Date – Premier Investments (PMV). Div Pay-Date – WBCPK (WBCPK)  
  • Wednesday: Div Ex-Date – Fisher & Paykel Healthcare (FPH) Div Pay-Date – WBCPH (WBCPH), WBCPJ (WBCPJ)
  • Thursday: Div Pay-Date – WBCPE (WBCPE)
  • Friday: Div Pay-Date – Westpac Banking Corporation (WBC)

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 MillerT: (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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