Investment update for February 2022
In February, the major crisis of Russia invading Ukraine led to a variety of sanctions imposed on Russian exports and assets, and a collapse in the price of Russian equities, bonds and the ruble currency. The corresponding increase in risk aversion led to a decrease in the performance of global equities.
The invasion of Ukraine contributed to a spike in commodity prices, including oil, as Russia is a key producer of oil and gas. Russia and Ukraine are also significant exporters of agricultural products, such as wheat and corn. Furthermore, the uncertainty led to an increase in the perceived safe haven asset, gold, and an increase in the volatility index, VIX.
The Australian market was one of the few that posted positive performance, with the resources sector being the major contributor, supported by the rise in commodities prices. In addition, the financials sector also contributed to positive performance in the month.
Economic indicators within the US were generally positive with the service and business PMIs exhibiting an increase from prior months. Furthermore, employment and wages data also recorded an increase. With high inflation and strong employment, the expectation of the market is still for the US Fed to follow through on rate hikes over the course of the year. Nevertheless, investor concerns over the Russia-Ukraine situation, and tighter monetary policy, witnessed the decline in the US equity market.
Headline inflation within Europe is also at a high level, with a large part coming from energy inflation. While the ECB is not ruling out a rate hike over the year, the meeting during the month suggested a gradual approach would be undertaken. While economic indicators were generally positive, concerns around the disruption of Russian commodity exports, and its significant impact on Europe, led to the decline in European markets over the month.
Bond yields rose in the month, particularly Australian government bond yields, which resulted in the negative performance of bond indices. Inflation remains a key focus of central banks and markets continue to expect rates to be increased during the year. The latest commentary from the RBA, amidst the announcement of its decision to leave the official interest rate target on hold at 0.10%, was that it was prepared to be patient when it comes to raising interest rates.
The Australian dollar outperformed against the major currencies over the month given the strong prices exhibited by Australia’s major export commodities.
Australian listed real assets outperformed international listed real assets, in line with broader equity markets, despite bond yields rising relatively more in Australia during the month.
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Note: The AvSuper Growth (MySuper) option was assessed as underperforming in the 2021 YFYS Annual Performance Assessment (APA). Click here to read more.