Quarterly Market Update – Q2 2022

June Quarter 2022

Market and Asset Class Views

Australian Equities:

In comparison to major global equity markets the ASX200 performed well over the March quarter, ending up 0.7%. Volatility increased during the period as investors factored in likely hikes in interest rates as inflation in many jurisdictions hit multi-decade highs. This was coupled with Russia’s invasion of the Ukraine lifting fears of commodity supply constraints, with price rises fuelling further inflation pressures and economic growth concerns (oil prices hit a 14 year high).

Domestic growth rebounded as we exited Covid lockdowns, with the latest GDP data for the December quarter reporting the best growth since 3Q20, at +3.4%. Household consumption was a major contributor, being the strongest in five quarters at +6.3%. Market economists continue to be optimistic, expecting GDP to be mid-4% for CY22 and circa 3.5% for CY23. Whilst higher inflation is a possible headwind for growth, this is anticipated to be offset by higher commodity prices and export volumes. The latter recorded an 8% increase to a record high of $49.25bil in the latest January release and the trade surplus printed the second highest on record.

The RBA again left interest rates unchanged at 0.1% in their March meeting, having announced in their previous meeting they would cease their bond buying (QE) on February 10th. They see the global environment continuing to recover from the pandemic and the AU economy remaining resilient, however the war in the Ukraine is a major new source of uncertainty. Their updated economic estimates acknowledge inflation will increase more quickly than previously thought, with core CPI now expected to be at 3.25% by year end. The impact of the invasion of the Ukraine is a risk for further commodity price rises. Domestically they expect a robust economy, with GDP growth of 4.25% at year end, supported by unemployment at a current 14 year low and estimated to drop further to sub 4%. Governor Lowe did comment in a speech that it is a plausible scenario that rates could rise later in 2022. Most economists expect the RBA will hike rates this year, with a number expecting a move in June as inflation spikes on commodity price increases. 

The December half reporting season concluded with a mixed scorecard. Whilst overall earnings were positive, this was mainly driven by the large cap sector, whereas small caps saw more earnings misses and thus full year downgrades. Supply chain issues and inflation were key themes cited by management, which present challenges into FY22/23 if we see economic conditions deteriorate. ASX200 EPS growth estimates for FY22 remain at circa 14%, however current FY23 expectations are only for a flat to slight rise in earnings.

The AUD hit a four-month high of 75.20 in late March as global commodity prices spiked on supply concerns, courtesy of the invasion of the Ukraine and sanctions imposed on Russia. The strength in the terms of trade is supportive of the current levels, as has been the recovery in global growth. The risk is a correction in that growth outlook if central banks struggle to contain the inflation run-up and tighten rates aggressively. We remain neutral on the AUD. 

The FY23 Federal Budget saw further fiscal stimulus with the Treasury being a major beneficiary of rising commodity prices. In advance of an expected Federal Election in May, it was no surprise the government targeted assistance to the cost of living as inflationary pressures impact household finances. We stay alert to external shocks – the war in Ukraine, commodity prices, China lockdowns disrupting supply chains and bond yields, but believe the composition of the ASX200 with a strong resources and energy focus plus an accommodating rate environment for banks is supportive of the market.

We remain Overweight,

US Equities:

A volatile March quarter saw the S&P500 hit an all-time closing high of 4,796 in early January, then enter a technical correction falling at worst -13% as inflation spiked and expectations for interest rate hikes were aggressively raised, combined with the war in Ukraine. By quarter end the market had recovered some of this decline and ended down 4.95%, as hopes increased for a ceasefire in Ukraine and investors digested the Federal Reserve’s (FED) outlook for CY22 interest rates and inflation.

As inflation continued to spike and hit forty year highs, the consensus among economists increased to expect the FED would hike interest rates at all of their seven meetings over the remainder of CY22. The latest February inflation data printed at the highest level since 1982, with headline at +7.9% and core at +6.4% (YoY). The FED’s hawkish pivot in January was confirmed in their March meeting as the committee lifted rates by 0.25% (range 0.25-0.50%), the first increase since December 2018, highlighting they are acutely aware of the need to return the economy to price stability and anticipate ongoing increases in the target range will be appropriate. The so called dot-plot projection of Board member expectations has lifted to an estimate of 1.9% for the Fed funds rates by December, up from their previous 0.9%. The narrative has changed with Chairman Powell now saying rate hikes could become more frequent and aggressive in size. They raised their official estimate for CY22 core and headline inflation to 4.1% and 4.3% respectively and reduced their GDP forecast to 2.8% versus 4.0%. The latest GDP growth for 4Q21 was +6.9% QoQ and +5.7% for CY21.

A continuation of rising costs were again evident in the 4Q21 reporting season, with corporates across multiple industries flagging price pressures. This burden has spread from the ongoing supply-chain disrupted industries to strong wage expense in service industries, with a number of the major US banks flagging they expect circa double-digit expenses increase for CY22. The impact of the war in Ukraine and retaliatory sanctions against Russia are lifting concerns on supply chain disruptions beyond just the energy sector, given the two countries combined are major exporters of numerous commodities; such as wheat, lumber, fertiliser, refined copper, aluminium and processed nickel. At a consumer level, the oil price shock has pushed the average US vehicle gas price to its highest nominal price on record.

The 4Q21 results outcome was a beat at +31% earnings growth and the first time in 12 years that has seen four consecutive quarters above 30% growth. This drove the overall market to historic peaks and saw Apple Inc. become the first US company to hit $3.0 trillion in market value. The consensus for 1Q22 EPS growth is currently +5% YoY and for CY22 +9.1%, with the bears closer to a 5% estimate for the latter. This year’s more muted outlook has seen equity strategists downgrade their year-end target for the S&P500 to around 4,700 (with one conservative estimate at 4,000).

The outlook has become more challenged as central banks grapple to control spiking inflation, without suffocating economic growth or causing a recession. As we have opined previously, the FED unfortunately has a poor record of managing a sustained run-up in inflation.

We move to a Neutral weight.

EU Equities:

Having hit an all-time high at the beginning of January, the European Stoxx600 suffered a technical correction over the course of the March quarter. Increased geopolitical tensions, rumours of Russian aggression against the Ukraine and their subsequent invasion on February 24th caused markets to fall 6.5% over the period. Europe’s trading relationship with both countries, particularly in commodities, combined with concerns on elevated inflation and ongoing Covid outbreaks caused investors to lower risk asset exposure.

The war in Ukraine has overshadowed a solid recovery in economic growth across the region. The EU recorded 5.3% GDP growth in CY21, the revival in activity beating both the ECB and the IMF’s 5% expectation. Likewise, in the UK the latest data for January showed the strongest growth in seven months, with GDP now 0.8% above pre-pandemic levels. The EU’s reliance on both nations for significant commodity imports has raised questions on the both inflation and the growth outlook. Russia provides the EU with approximately 40% of its natural gas and 25% of its oil imports, the prices of which have both spiked. The Ukraine exports of raw materials and agricultural products to the region have grown 50% in Euro terms over the last 5 years. The crisis has increased concerns on the outlook for CY22, with market economists cutting their GDP estimates and the European central bank lowering their forecast to 3.7% growth vs. previous 4.2%.

As globally, EU inflation has continued to rise and hit a record high for both headline and core CPI of 5.9% and 2.7% YoY respectively. The ECB left interest rates unchanged in their March meeting, but suggested they could end their QE program by 3Q22. They also acknowledged that the current geopolitical issues will have a material impact on growth and inflation courtesy of higher energy and commodities prices. Their estimate for CY22 inflation was lifted to 5.1% vs. 3.2%. In contrast, the Bank of England raised rates for the third consecutive time to 0.75% as inflation hits a 30 year high (headline 6.2% and core 5.2% YoY), with the BOE suggesting an 8% level is possible over CY22.

An additional challenge is the resurgence of Covid cases in some EU countries such as Germany and Austria, who are recording new peaks in daily cases since the start of the pandemic. With the former ending all Covid curbs mid-March (as other jurisdictions have also done), the test will be the impact on activity as was seen in January’s stalled industrial production of zero growth courtesy of on-going supply constraints.

A better than expected 4Q22 results season was not enough to calm investor nerves in light of the Ukrainian crisis. EPS growth for the quarter was +43%, up from the 38% expected in early January. Likewise, for CY21 a 78% increase was a beat on the earlier 73% expectation. Consensus estimates for 1Q22 are +13.5%, however we expect to see downgrades if the region’s economy continues to stall. Despite the uncertainty, M&A activity remains active with major takeover bids in the telecoms, industrials and financial sectors. We expect volatility to remain through the June quarter. From a humanitarian standpoint hopefully we reach a ceasefire in the Ukraine quickly, which would be positive for market sentiment, however macro issues of inflation and supply chain disruptions will persist, thus we move to a Neutral weighting.

EM Equities:

The EM equity market experienced a similar quarter as the developed world, with the MSCI Emerging Markets Index recording a loss of XX% amid a global sell-off in risk assets in February.

After two years battling a pandemic, the Russia-Ukraine conflict adds to the complexity and concerns around inflation and the economic recovery. While it is still too early to say what the longer-term ramification will be, the obvious first-order consequences are tougher sanctions on Russian companies. Notwithstanding the impact, Russia only accounted for a very small proportion in Emerging Markets Indices. During the March quarter, market leading index provider MSCI has further made the decision to remove Russian securities from the Emerging Markets Indices, effective 09 March 2022.

EM countries that depend on Russia and Ukraine’s supply of energy and food will feel the pain of price spikes. Conversely, Southeast Asian markets with significant oil or commodity production, held up well during the quarter.

Many are comparing China with Russia in terms of political and economic positioning. However, China is more far more integrated into the global economy – being a major end market for most Western companies and a major supplier into Western markets. The Chinese government is keen to spur domestic consumption, provide support to the economy but is sensitive to the structural imbalances in its economy (i.e., property)

China is currently going through the worst Covid outbreak since Wuhan two years ago, which has caused lockdowns in large parts of the country. We see the Chinese lockdown system will these figures, but the economy will suffer. China’s GDP growth slowed down to 4%, amid multiple headwinds including a property downturn, supply chain issues and the Covid19 outbreaks. Economists are betting on rate cuts by the People’s Bank of China in the next two months and a further easing of restrictions on the property sector to stimulate construction activity and the broader economy.

South Korea’s economy expanded at the fastest pace in 11 years amid a strong demand for exports from the US, Europe and China. Manufacturing PMI also rose to an 8-month high in February boosted by car production and semiconductors. Taiwan’s factory and output growth slowed down, albeit solidly overall.

From a valuation perspective, Indian stocks are relatively expensive within EM markets and the oil/ commodity price surge is likely to hurt Indian company profits more in the months to come. We see Chinese stocks oversold and therefore expect a rebound on stimulus announcement. In EM ex-China, the food and oil prices shock, monetary tightening in some countries and a lack of fiscal stimulus in others will hinder overall growth.

We see EM stocks as fairly valued, but the direction of their next move depends on gaining more clarity on the corporate profit outlook, visibility on shifts in trade balances and sentiment on geopolitical trading bloc realignments. We remain Neutral on this asset class.


Over the quarter, A-REITs experienced a sizable pulled back in line with risk assets driven by elevated inflation expectations, bond yields and geopolitical tensions. This saw the index down 7.7% in comparison to with the broader ASX200’s +0.7%.

Domestically, economic fundamentals remain sound with the latest GDP data delivering a positive message for Australian economic recovery as consumer demand surged back from coronavirus lockdowns. Retail sales and consumer spending remains healthy as shown in January and February’s reading.

Historical data suggests that REITs trade poorly during periods of bond yields escalation in comparison to the border market. With rate hikes on the horizon, we stay cautious and remain Neutral on the Australian listed property sector whilst actively monitoring the flow-on effects from the global supply chain challenges and bond yield movements.


Private Equity

Our maximum setting in Private Equity has come into question heading into the next quarter, courtesy of the geopolitical risks.

We take the view that the illiquid nature of private assets is a positive for the portfolio amidst times of significant sell-offs as managers avoid the necessity to liquidate. We remain positive that experienced private equity managers can manage their portfolios adequately with-in the current environment, noting specific sectors, industries and companies will be adversely affected.

We take direction from public equity markets over the next quarter as a lead indicator as to when and if we down-weight our exposure to Private Equity later in the year as conditions for new Vintages potentially deteriorate. We retain our Overweight call and remain bullish towards Private Equity for the coming quarter.


Gold was tested as a safe-haven asset during the Russian/Ukrainian war and passed – rising (1.94%) since the beginning of the year. Though a stronger $A has muted this return

Where to from here?

We gain confidence in the long-term allocation to gold as portfolio hedge against long term adverse macroeconomic and short-term geopolitical events. We also see stronger Central Bank support through a diversification away from the USD for reserve requirements. We retain our Neutral setting in the portfolio with an understanding that further escalation of geopolitical tension will likely lead to a higher gold price and vice versa.

Hedge Funds

Our favourable, slight positive view for the previous quarter was intended to add diversification to the portfolio ahead of any major market moves. The index (HFRX Global Hedge Fund) out-performed public markets returning -2.00% over the quarter.

We retain this view particularly towards unconstrained Hedge Funds which can tactically benefit by moving into or hedging assets that are linked to the continued inflationary pressures and significant up-swing in commodities. We remain Overweight.


We have benefited from positive performance with the increased allocation to Infrastructure from the March quarter, +1.02% as measured by the S&P Global Infrastructure TR Index.

The continued inflationary pressures make Infrastructure attractive being an inflation sensitive asset class. Given the defensive nature of certain types of infrastructure assets with the opportunity for upside participation, we retain our Overweight call on Infrastructure for the coming quarter.

Fixed Income:

Over the March quarter, bond markets have undergone a significant repricing, driven by major central banks’ tightening on both monetary and fiscal fronts with interest rate hikes and slowing of asset purchasing programmes, which has been further fuelled by Russia’s invasion of Ukraine US 10-year bond yield jumped from 1.51% at the end of last year to 2.34% by quarter end. Similar moves were observed in the domestic market where a similar outlook for inflation sent AU 3-year yields surging to their highest since early 2019 to 2.43%, with the 10-year bond yields climbing to 2.875%.

Bond yields movement over past 12 months

Source: Thomson Reuters

Last week, the shape of the yield curve also started to change, as we saw the short-end of the curve creeping up and the gap between 2 and 10-year Treasuries – as well as 5 and 10-year – dipping into negative territory. Although the fears of an imminent US recession may be premature, we continue to watch the level and shape of the yield curve closely, as the bond market usually provides a timelier and more accurate signal on the economic outlook than the equity market.

US short-term / long-term treasury slope

Source: BCA

Inflationary pressures in the service sectors and labour markets remain elevated particularly in the UK and US economies, however the latest data is pointing to a fading upward pressure on global inflation particularly in the goods sector with an easing in supply chain disruptions.

On the policy front, the Fed appeared to be committed to bring inflation expectation back in line – with Chairman Powell stating that rate hikes could become more frequent and aggressive in size followed by the 25bps hike in the March FOMC meeting. The market is expecting the current tightening cycle to peak in mid-to-late 2023.

Acknowledging the possibility for yields to rise further over the coming June quarter, we believe that the inflation expectation and interest rate movement is largely priced in. We therefore move to modest Underweight on traditional long duration Government bonds. Looking at the market through the credit lens, we expect household consumption and corporate earnings to continue to be supported by the generous fiscal spending and the current headwinds such as inflation pressures, geopolitical uncertainty and the lingering pandemic situation to gradually subside. With the higher all-in yields from higher rates and wider credit spreads, we move to Neutral from modest Underweight in Credit.

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