Market and economic snapshot
The quarter ending September 2022 saw inflation persisting, aggressive interest rate rises from major central banks and the tragic war in Ukraine all continuing to cast a shadow over global financial markets.
Let’s look at what happened and the outlook for markets.
Key events in global markets
Investor sentiment became increasingly cautious in the face of the acute inflation and interest rate risks and, consistent with this, global shares again delivered a very weak return.
In the US the key index on Wall Street (the S&P 500 Index – an index of the 500 largest companies on the US share market) declined by more than 9% in September. The primary catalysts for weaker US shares were high inflation and another interest rate rise by the US Federal Reserve (Fed). Fed Chair Jerome Powell has warned that the central bank is "strongly resolved" to lower inflation and "will keep at it until the job is done”1.
European shares also disappointed in response to inflation concerns as well as the Ukraine crisis. Asian share markets also struggled.
Key events in local markets
Australian shares were also sensitive to the global turmoil, and the Reserve Bank of Australia (RBA) raising interest rates, but managed to deliver a mild positive 0.4% return for the three months to the end of September in the key market index (ASX 200 – an index of Australia’s 200 largest companies on the share market).
The Energy sector continued its strong run given the surge in coal and gas prices, Health Care stocks proved to be a safe haven for investors while the Financial sector was resilient with a mild gain. However, there were disappointing returns from the Utilities and Real Estate Investment Trusts (REITs) sectors given their sensitivity to rising interest rates.
Australia's economy appears solid in contrast to the global recession concerns judging by encouraging results in business surveys, employment, and retail spending. Australia's unemployment rate has fallen to 3.5% in August. Yet the inflation acceleration is very concerning and has warranted the RBA raising interest rates from 0.1% in March to 2.6% in October. Australia's consumer inflation appears on track to meet the RBA's forecast inflation peak of 7.75% at the end of this year.
What’s next for markets?
The troubling trio of rising inflation, higher interest rates and the war in Ukraine is proving to be a painful investing climate this year. Inflation is now at multi-decade highs around the world with consumers acutely pressured by the higher 'cost of living'. Central banks are rapidly raising interest rates to cool these inflation pressures.
We continue to assess whether central banks can safely navigate the challenge of moderating inflation without severely damaging economic growth. As interest rates sharply rise and financial conditions for borrowers become tougher, recession risks will likely rise.
We face the task of assessing these considerable inflation and interest rate risks and in this dynamic investment climate multiple positive and negative scenarios are possible.
The cornerstone of our investment philosophy is effective diversification and in line with this, our strategy includes measures to both protect and drive returns through all market ups and downs.
Further, we’ve been concerned about inflation for some time and that’s why we have allocated funds towards alternative assets which have different return patterns to traditional assets and offer attractive yields relative to cash and bonds. We also believe our alternative assets are more favourably positioned for an environment of rising inflation and rising interest rates compared to fixed income and shares.
Markets may continue to be volatile and returns subdued as interest rates continue to rise. But while the current market environment is challenging we remain focused on our proven disciplined strategy to manage these extraordinary risks over the longer-term to maximise the chances of your employees achieving a comfortable retirement.
1 Fed Chair Jerome H. Powell at “Reassessing Constraints on the Economy and Policy,” an economic policy symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming on August 26, 2022
Important information: This document has been prepared by IOOF Investment Management Limited (IIML) ABN 53 006 695 021, AFS Licence No. 230524 as Trustee of the IOOF Portfolio Service Superannuation Fund ABN 70 815 369 818 (Fund). IOOF Employer Super is a Division of the Fund. IIML is part of the Insignia Financial of companies, consisting of Insignia Financial Ltd ABN 49 100 103 722 and its related bodies corporate. This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek advice from a financial adviser and seek tax advice from a registered tax agent. Please obtain and consider the PDS and the Target Market Determination (TMD) both of which are available for consumers to better understand products before making any decision about whether to acquire a financial product. Information is current at the date of issue and may change.