Economic and market snapshot

The second quarter of 2022 saw the world continue to grapple with the terrible human tragedy of war in Ukraine, and the additional disruptions to commodity supplies as a result. Global inflation has persisted and surged further, challenging global markets, with energy and food prices remaining high, and central banks starting to rapidly raise rates to try and contain it. 

Let’s assess what happened and what may be ahead.

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Key events in global markets

Global shares delivered a very weak return in the three months to June 2022. Investors were initially concerned about persistent inflation pressures and rising bond yields, meaning investors are selling bonds in the expectation that interest rates will increase.

Russia’s invasion of Ukraine on 24 February then generated alarm in financial markets. The tragic loss of Ukrainian lives and the traumatic flight to safety westwards cast a troubling shadow as well as intensifying inflation and interest rate concerns. 

In the US, stocks made a sharp retreat from the record highs set in early January. Inflation concerns dominated with US consumer annual inflation reaching 8.6% in May. US government bond yields and interest rates rose sharply given these inflation risks, denting investors’ previous optimism. The US Federal Reserve (Fed) raised the US interest rate by 0.25% in March, 0.5% in May and by a further 0.75% increase in June in response to high inflation.

European shares also fell sharply in response to inflation concerns as well as the Ukraine crisis. Similarly, Asian share markets also struggled given rising global recession concerns. By contrast, China’s share market gave some early signs of stabilisation with a 4.5% quarterly gain after a disappointing year in 2021. Hopes for more government support to a subdued Chinese economy and weak property market appears to have supported Chinese shares.

Key events in local markets

Australian shares have fallen sharply in response to global political and inflation concerns. For the three months to June, Australian shares delivered a very weak -11.9% return in the key market index (ASX 200 – an index of Australia’s 200 largest companies on the share market).

At a sector level, we saw Information Technology lead the slide given a negative assessment of prospects with higher inflation and interest rates. Resources went into reverse after robust gains with investors worried about global recession risks. Financial shares were also a major disappointment given concerns that higher interest rates will adversely impact demand for loans. 

That said, Australia’s economy appears to be improving judging by solid results in business surveys, employment, and retail spending. Australia’s unemployment rate has fallen to 3.9% in May, the lowest since 1974. However, the inflation acceleration is very concerning and has warranted the Reserve Bank of Australia (RBA) to raise the interest rate by 0.25% in May and 0.5% in June. The RBA Governor, Philip Lowe, has added to concerns by signalling that Australia’s annual inflation is expected to rise to 7% by the end of this year.

What’s next for markets?

The troubling trio of rising inflation, higher interest rates and the war in Ukraine is providing a more challenging investing climate this year. Inflation has moved to multi-decade highs around the world. Central banks with inflation targets are now compelled to rapidly raise interest rates to cool these pricing pressures. 

We continue to assess whether central banks can safely navigate the challenge of moderating inflation without severely damaging economic growth. As interest rates sharply rise and financial conditions for borrowers become tougher, naturally concerns about recession may increase.

The cornerstone of our investment philosophy is effective diversification and consistent with this, our strategy has included measures to both protect and drive returns through all market ups and downs.
 
Further, we’ve been concerned about inflation for some time and that’s why we’ve been allocating funds in our lifestage and other diversified funds towards alternative assets which have different return patterns to traditional assets and offer attractive yields relative to cash and bonds. We also believe our alternative assets are more favourably positioned for an environment of rising inflation and rising interest rates compared to fixed income and shares.

While the current market environment may feel unsettling, we shouldn’t forget how much recovery has happened since the pandemic-driven recession and we always expected that rates would need to shift back from their ‘emergency’ pandemic settings. While markets will likely continue to be volatile over the short-term, and returns challenged as interest rates continue to rise, we remain focused on our proven disciplined strategy to deliver over the longer-term to maximise the chances of your employees achieving a comfortable retirement.

Important information: This document has been prepared by IOOF Investment Management Limited (IIML) ABN 53 006 695 021, AFS Licence No. 230524 as Trustee of the IOOF Portfolio Service Superannuation Fund ABN 70 815 369 818 (Fund). IOOF Employer Super is a Division of the Fund. IIML is part of the Insignia Financial of companies, consisting of Insignia Financial Ltd ABN 49 100 103 722 and its related bodies corporate. This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek advice from a financial adviser and seek tax advice from a registered tax agent. Please obtain and consider the PDS and the Target Market Determination (TMD) both of which are available for consumers to better understand products before making any decision about whether to acquire a financial product. Information is current at the date of issue and may change.