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Investment markets in review – Q3
Article

Investment markets in review – Q3

Pitcher Partners Investment Services (Melbourne) | The information in this article is current as at 10 October 2022.

Despite a positive start to the quarter, many global equity and bond markets closed Q3 in negative territory. Many central banks including the Federal Reserve and the RBA lifted interest rates aggressively over the period, signalling further rate hikes to combat stubborn inflationary pressures, which remained at multi-decade highs – dashing many investor hopes of having already reached ‘peak inflation’.

Slowing global growth also weighed on the performance of markets (including commodities) while geo-political tensions continue to remain fraught, as Russia escalated the war in Ukraine by holding referendums in occupied Ukrainian territory, and by announcing a huge “mobilisation” from the general Russian population into its armed forces.

The demand for ‘safe haven’ investments resulted in the US Dollar reaching an all time high against many currencies, causing some concern for the flow on effects, especially on select emerging market economies.

Finally, during the last few days of the month, global currency and bond markets saw a dramatic increase in volatility, as the United Kingdom government announced a spending package designed to stimulate the economy. The scale of the package and lack of detail on the finer points of the policy intensified inflationary concerns, resulting in a spike in global bond yields while the pound collapsed to an all-time low vs. the US dollar, adding to general macroeconomic volatility.

Equities

Australian equities (+0.4%) outperformed hedged global equities (-4.4%) over the period, thanks in part to a local reporting season which highlighted generally stronger than expected revenues, but that future margins were under pressure from rising costs. US corporate earnings were also more resilient than initially feared. Unhedged global equity investors benefitted from a weak Australian dollar, keeping the index in positive territory for the period.

At the regional level, emerging markets provided the weakest returns reflecting concerns over slowing growth and a high US Dollar, while Japan performed the best in a relative sense in local currency terms.

There was a considerable level of volatility and rotation across the various sectors and styles intra-quarter, however growth outperformed value, while energy and consumer discretionary stocks provided the greater opportunities for outperformance. The higher interest rate settings saw the technology, communications and listed property stocks amongst the weakest performers.

Fixed Interest & Credit

Local interest rate and credit markets proved to be more resilient than offshore markets, amid another volatile quarter.

In an attempt to curtail still pervasive inflationary pressures despite slowing growth, we witnessed a considerable level of monetary policy tightening from central banks across Q3, with the RBA lifting the cash rate from 0.9% in June to 2.6% in early October, whilst the Federal Reserve lifted its Funds Rate by ~175bps over the same period. At the time of writing, markets have priced in an effective peak cash rate of ~4.3% in the U.S by March 2023, implying further rate hikes to come.

Late in the quarter, the United Kingdom’s budgetary announcement accelerated the bond sell-off as investors questioned the credibility of the government’s fiscal framework. Significant losses were witnessed across the gilt market, which forced the Bank of England to intervene by temporarily buying long dated gilts.

This led to our global bond benchmark falling 3.8% for the quarter, while our local bond market fell 0.6%.

Credit spreads widened over the period reflecting a deterioration in the outlook for global growth and broader market volatility. These moves were more pronounced offshore than onshore. Unsurprisingly, floating rate investors outperformed fixed rate, with the Bloomberg AusBond Credit FRN Index (All Maturities) rising 0.7%.

Commodities

The S&P GSCI Index recorded a negative performance in the third quarter, as concerns over slowing growth resulted in weaker prices for energy, industrial metals and precious metals. Energy was the worst-performing component of the index in the quarter, with sharply lower prices for crude oil, Brent crude and unleaded gasoline offsetting higher prices for natural gas, which rose appreciably in Europe intra-quarter due to the ongoing ‘weaponisation’ of the Nord Stream gas pipeline by Russia.

Within industrial metals, prices for aluminium, copper and nickel were all lower. Within the precious metals component, the price of both gold and silver declined in the quarter, despite the higher demand for safe haven assets during the period.

Our articles this quarter

These continue to be challenging times for investors and we look forward to sharing with you our Investment Strategy Committee’s refreshed outlook for markets in the coming weeks.

In the meantime, our articles this quarter take a look at the ongoing bifurcation of the office property sector, which in addition to the changing dynamic of working from home, is experiencing further structural changes.

We also provide an update on global supply chains. The significant dislocation experienced over the past few years is starting to show some signs of easing, however new problems are emerging – which means that ‘logistics’ and ‘inventory management’ should play a bigger factor in your investment decision making process than perhaps they did pre-pandemic.

This document has been prepared for the exclusive use and benefit of Pitcher Partners Investment Services Pty Ltd (AFSL 229887), our clients and our Authorised Subscribers. It must not be used or relied on by any other person, without our prior written consent. Information is sourced from third parties and Pitcher Partners believes it to be reliable at the date of publication, although we cannot guarantee accuracy and reliability, nor do we accept responsibility for errors and omissions. The information, including opinions, estimates and forecasts contained herein are as of the date of publication and are subject to change without notice. Pitcher Partners is under no obligation to correct any inaccuracy or update the information. Any financial product advice contained in this document is general advice only and does not take into account your objectives, financial situations or needs. If you wish to acquire a financial product, we recommend you seek advice from a Pitcher Partners Investment Services’ representative, and where applicable, consider the relevant offer document prior to making any financial decision. Before acting on anything contained in this document, you should speak to your Pitcher Partners Investment Services’ representative and consider the appropriateness of the information or general advice having regard to your objectives, financial situation, or needs. If you act on anything contained in this document without seeking personal advice you do so at your own risk. To the maximum extent permitted by law, neither we, nor any of our representatives, will be liable for any loss, damage, liability, or claim whatsoever suffered or incurred by you or any other person arising directly or indirectly out of the use or reliance on this information, or any changes made to this document without our prior written consent.

Pitcher Partners Wealth (WA)

The advisers detailed above and Pitcher Partners Wealth (WA) Pty Ltd (127 4651) are Authorised Representatives of Sentry Advice Pty Ltd, (ABN 77 103 642 888) AFSL 227748.
Christian Golding

Christian Golding

Executive Director

Perth


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Simon Montgomery

Simon Montgomery

Executive Director

Perth


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Robert Prince

Robert Prince

Executive Director

Perth


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Leanne Martinez

Leanne Martinez

Strategic Wealth Adviser

Perth


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