Investment update for January 2022

The spread of Omicron is having a big impact all over the world, however there are signs in some regions that the number of new cases has peaked. During the month, the UK announced that Covid restrictions will end, with mandatory face coverings in public and Covid passports both being removed. Several countries such as Thailand and Singapore have established a quarantine-free entry program for vaccinated travellers to encourage tourism and trade.

Australian and international equity markets experienced market falls to start 2022, primarily driven by a sell-off in growth related stocks which reacted to the expected hiking in interest rates by central banks globally. US technology stocks were some of the hardest hit, while European stock markets, with less technology exposure, produced smaller negative return. Meanwhile, UK equities produced a small positive return.

Tensions between Russia and Ukraine escalated amidst the build up of Russian troops near the Ukrainian border, with fears of a possible invasion. In addition, there were supply shortages as some OPEC producers struggled to pump more oil. The result was oil prices experiencing double digit gains over the month. High commodities prices continue to drive the strong returns posted from the Australian resources sector. While Russia experienced a decline due to tensions with Ukraine, other net oil exporters, such as Saudi Arabia, Kuwait and Colombia, were beneficiaries of the higher energy prices. Overall, the emerging markets equity index outperformed the World index in January.

Bond yields rose during January, and this resulted in major bond indices producing negative returns over the month. Inflation which is a key factor that impacts central banks’ interest rate policy decisions remains high relative to its historical average. This has led to market participants forecasting multiple rate hikes, including in the US and Australia over 2022. The US Federal Reserve stated at its January meeting, that it expects it will soon raise rates, while the RBA is still advising it will be patient before it raises rates. Inflation in the Eurozone is above the European Central Bank’s target, but ECB president, Christine Lagarde, reiterated that any determinations to increase interest rates will be gradual.

Despite the increased volatility experienced over the month, credit spreads have only increased modestly. The key driver of bond index performance in January was the rise in the base government bond yields.

The increase in market volatility made the Australian dollar decrease relative to major developed countries over the month. The fall in the Australian dollar is also impacted by the RBA’s current stance on monetary policy, which understates the likelihood of an interest rate hike in the near-term. Meanwhile, the increase in the US dollar was impacted by the expectation that the US Fed would be raising rates soon.

The listed real assets market was also adversely impacted by the increase in bond yields impacting the valuations of assets. Australian listed property produced a large negative return over the month. Nevertheless, this is after a period of very strong returns and the performance of the listed real assets market is still strongly positive over the last 12-months.

We trust you find this information useful in understanding how your AvSuper investment is being influenced and welcome your feedback on how we can improve the information we provide to you.

Read our monthly market snapshot here.