Inflation vs The Market
Once again, the major theme of the quarter was all about inflation.
The upsurge in inflation is due to a combination of factors, starting with the disruption to global supply chains caused by the pandemic, central banks and governments pumping up demand through monetary and fiscal stimulus; Russia’s invasion of Ukraine, and China’s continuing pursuit of a zero-Covid policy.
Russia’s invasion of Ukraine and China’s lockdowns have dramatically compounded supply constraints, driving up prices – especially on non-discretionary items like energy and food.
Higher than expected inflation has meant that interest rates are rising faster and higher than originally forecast. Central banks around the world – including the RBA - are now in a situation where they are trying to engineer a slow-down in demand to contain inflation, while trying to maintain economic growth and not push their economies into recession.
- Due to rising yields bonds had negative returns for the quarter & year.
- The Australian equity market (S&P/ASX 200 Index) returned a modest 2.2% for the quarter but returned just over 15% for the year.
- International markets have been hit harder by the fall in tech stocks and the conflict in the Ukraine.
- Over a 10-year period the global markets have returned approximately 6% p.a. higher than Australian shares.
- Emerging Markets were down -2.5% for the quarter due to China but positive 2.9% for the year.
- Australian and Global REIT’s have had a strong quarter and strong year, rebounding from lows post the March 2020 quarter.
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- Value stocks outperformed the overall market by 1.9% for the quarter and 5.2% for the year, as lower P/E companies on average did better than higher P/E companies (typically in IT).
- Smaller companies underperformed the overall market, which is not uncommon in volatile periods.
- The story is the same in developed markets, where the rout in high P/E tech stocks has resulted in an extraordinary value premium of 10.8% for the quarter and 17.4% for the year.
- Smaller Cap companies underperformed the overall market, but not as severely as in Australia.
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