June proved to be another difficult month for financial markets with both bond and equity markets moving lower, a theme that we have seen play out throughout most of the calendar year to date.
Bond and Equity Move Lower
Over the last 12 months both bond and equity markets domestically and globally were all lower. The ASX 200 was down -6.5% over the last 12 months ending June 30. However, our local bond market was down -10.5%. This was on the back of higher bond yields, particularly at the long end of the curve, which was up over 200 basis points throughout the course of 2022.
Global Markets were similarly lower, both in terms of the month of June, but also over the last 12 months. And that’s been particularly the case in higher risk assets, such as global small caps and emerging market equities.
3 factors we believe will continue to drive financial market performance through the rest of this calendar year, and most likely into 2023.
1 – High Commodity Prices
Higher commodity prices continue to have a big impact globally. Food prices, agriculture goods, energy, gas and oil prices have all risen across the course of the year.
2 – Economic Slowdown in China
The economic slowdown in China is also having an impact on the supply of goods into global markets. Pent-up demand post the Covid lockdowns has made this more challenging.
An ongoing decline in the property market, as well as broader industrial slowdowns due to the COVID zero policy is also continuing to have a large impact on financial markets and broader economic activity.
3 – Lack of Labour Force Mobility
The third element that we continue to see is the lack of labour force mobility. Whilst unemployment rates globally are reaching multi year lows, labour shortages across a host of industry sectors still remains a challenge.
This is pushing up wages which is creating further upward pressure on global inflation.
These inflationary pressures are resulting in central banks being forced to raise cash rates. We have already seen this over the course of 2022 globally and expect to continue into next year.
Rising cash rates have had a dampening impact on economic activity. Consumer confidence has certainly taken a hit over the last quarter, and we expect that as cash rates move higher, hiring will also likely dampen. This real risk to global economic growth through the 2H22 into 2023, which has the potential to flow into financial market performance.
Given this backdrop, we continue to maintain a flexible asset allocation approach and are maintaining diversity in our portfolios across all segments of the market. We are focused on investments that can continue to manage downside risks (with a skew to quality) and who also can provide some level of inflation protection.
Piers Bolger is Chief Investment Officer of Viridian Financial Group.
Visit our website: www.infinityassetmanagement.com.au
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