Investment update for August 2022
The month of August has noticed market volatility intensify in response to interest rate hikes, energy market concerns and geopolitical tensions. High inflation and recession risks are a key focus for investment markets.
In the US, reported GDP contracted consecutively in the June quarter, led by a sharp decline in inventories. However, the National Bureau of Economic Research (NBER) has not defined that the US is in recession, because there has not been a significant decline in activity across the economy. Consumption growth remains positive, although moderated from the prior quarter, and the labour market is strong, as new job openings remained elevated and wage growth continues to rise. The annual CPI inflation fell to 8.5% in July from a 40-year high of 9.1% in June, as energy prices came down from peak levels.
US Federal Reserve Chair, Jerome Powell’s speech at the Jackson Hole Economic Symposium emphasised restoring price stability and cautioned that doing so would likely require a restrictive policy stance for some time. In response to the speech, global equity markets fell, particularly in the US and Europe, producing a negative return for the month. Expectations of future interest rates increased, and sharp rises in bond yields caused negative returns for bonds. The USD appreciated further on the expectation of more interest rates rises in the US, although the AUD appreciated against other major currencies, given the RBA is also expected to continue to raise rates.
In Europe, energy market developments are a focus with extremely volatile gas prices rising to very high levels in response to the Russian invasion of Ukraine. The European Union is preparing to intervene in the short-term to try to dampen energy costs and reform the European power market. The Bank of England increased its interest rate and the European Central Bank (ECB) indicated it would be increasing rates also to address soaring inflation.
In Japan, inflation is much lower and interest rates are not expected to rise. This is driving a significant depreciation of the Yen, which contributed to the small positive performance of Japanese equities.
Inflation is also a concern in Australia and the RBA increased the cash rate and has signalled further hikes. Australian equities produced a small positive return over the month, due to a positive return from Resources stocks, contrary to oil and commodity prices generally falling in August.
The Reserve Bank of New Zealand announced its 7th consecutive interest rate hike, taking the benchmark policy rate to its highest level since 2015.
Chinese economic data is weak, damaged by COVID restrictions and a property market slump. The policy response is ramping up stimulus to counter the slowdown, with the People’s Bank of China (PBOC) lowering interest rates and the State Council announcing packages, including infrastructure investment and property finance support.
Listed real assets produced a negative return in August in response to rising bond yields. Listed property was particularly impacted, while negative returns from listed infrastructure were more moderate.