Investment update for June 2022

Global financial markets have experienced heightened volatility over the past financial year driven by the emergence of new strains of COVID-19, the invasion of Ukraine by Russia, persistently high inflation, tightening of monetary policy worldwide and strict COVID-19 restrictions in China. While market performance during the first half of the last financial year was mainly impacted by COVID-19 related factors, market performance during the second half was predominantly impacted by the news of Russia invading Ukraine, global central banks raising interest rates and the continuation of China’s zero COVID-19 policy.

Most countries gradually eased their COVID-19 restrictions over the past year as they transitioned from the pandemic phase to the endemic phase for COVID-19. Globally, economic activity broadly continued to recover because of this trend. Industries such as airline travel and hospitality rebounded particularly strongly amidst significant pent-up demand for these type of services after listing of restrictions. Given the sudden increase in demand and subsequent shortage of staff working in these sectors, this resulted in consumers experiencing lengthy delays and significant increases in prices.

The start of 2022 witnessed mounting speculation of a possible invasion of Ukraine by Russia, which eventuated during the month of February 2022. This had an adverse impact on the performance of global financial markets with sanctions being imposed on Russia by advanced economies including the US and the European Union. As Russia is a major exporter of commodities such as oil and natural gas particularly to Europe, the sanctions led to sharp increases in global commodity prices.

In China, the ongoing zero COVID-19 policy and strict lockdowns of major cities adversely impacted the global supply chain. This, together with high commodity prices, contributed to elevated inflationary pressures for major economies globally. To combat the increase in inflation, central banks around the world (except for Japan) have been raising interest rates at a faster pace in the second half of the financial year. This has impacted equity markets negatively. Stocks with high valuations and growth expectations (like Technology) sold off significantly.

Across the regions, emerging market equities performed poorly over the financial year largely driven by Chinese equities due to regulatory actions across several sectors such as technology, property, and education, but also because of concerns over economic growth caused by the authorities’ COVID-19 lockdown policies. Developed market equities also fell significantly over concerns on inflation and higher interest rates causing a recession. Australian equities also delivered a negative return over the financial year but performed better than most other regions largely due to its geographical distance from the war in Ukraine and its larger exposure to the resources sector that benefited from higher commodity prices.

Furthermore, the increase in interest rates and inflation over the last 12 months have negatively impacted bond prices as major bond indices posted negative performance over the past year. Long term government bond yields are at their highest levels in a few years, particularly in the US and Australia.

In currencies, the Australian dollar fell against the US dollar over the past year as market uncertainty and fears of a possible recession led to investors rotating capital towards safe haven assets such as the US dollar. The Australian dollar appreciated significantly against the Japanese Yen over the past year as the interest rate differentials between the two countries increased substantially, amidst the Bank of Japan’s divergent stance on not raising interest rates. The Australian dollar also appreciated against the Euro and British Pound over the same period.

Listed property produced significant negative performance over the year, with most of the underperformance being attributable to the increase in bond yields. Meanwhile, the performance of listed infrastructure was positive over the same period as infrastructure assets, particularly economically sensitive assets benefitted from the easing of COVID-19 related restrictions and reopening of global economies.

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