Market Update: August 2022

Market Update: August 2022

Market Overview

Australian share markets outperformed their global peers in August, delivering positive returns where most other markets were in the red. This follows on from a strong July which saw the local market up 5.75% and most other major markets up 6-7%. Whilst most people are no receiving their end of financial year statements showing mainly negative returns, the current financial year has seen most, if not all, of these recouped. We summarise the performance of key markets below.

The performance of equity markets in August is a tale of two halves. Most major global equity indices rallied in the first two weeks of the month. Evidence of easing price pressures coupled with signs of deteriorating demand conditions encouraged investors to bet that the Fed will soon be forced to abandon its hawkish stance. However, this was soon reversed as the economic heavyweights convened in Jackson Hole for their annual talkfest, and it became increasingly clear that the Fed remains committed to bringing inflation back down to target through further interest rate rises.

Reporting season has concluded in Australia which has generally beaten expectations. Results are showing that companies. Of the 207 companies covered by Macquarie, 75 (36%) beat the June half earnings estimates by at least 5%, while 57 (27%) missed. The better-than-expected earnings shows Australian companies are doing a good job of managing labour shortages, inflation and COVID disruptions in a challenging environment.

Stimulus announcements from China fell short of market expectations and are not sufficient to boost domestic economic conditions. As such, a bottom in Chinese equities remains elusive and industrial metal prices continue to face downward pressure. The poor outlook in China (and the rest of the world) coupled with the energy crisis, weak euro, expanding liquidity risk, and structurally poor profitability are weighing on Eurozone stocks.

Energy stocks have continued to lead the way in markets, which was interesting given that oil prices fell by 13.5% in August, the sector was mainly led by good results from Woodside. Our research team at BCA continue to expect bullish supply risks in oil markets to win the tug of war with the bearish demand outlook and as such, expect oil prices to remain high for the rest of the year and into 2023. Speaking of energy, in Britain the looming crisis became very real as the energy regulator announced an 80% increase in energy bills from 1 October. The electricity bill of a small café owner in Leicester went viral, which showed the rate rising from 15.69 pence per KWH to 81 pence per KWH, which equated to a jump, from 10,000 pounds per year to about 55,000 per year.

This huge increase in costs is having ramifications across all of Europe and the UK. The magnitude of the rises is putting severe pressure on businesses with many already indicating they will have no choice but to close. Obviously this then puts pressure on inflation on top of the other supply constraint pressures that exist world wide, and make the job of the central banks even tougher to be able to contain inflation whilst not pumping the brakes on the overall economy.

This all begs the question, where to from here? Whilst we see good value in credit markets, where bond returns are generally linked to cash rates and now enjoying yields upwards of 5%, we continue to adopt a cautious approach to markets in the short term. There is no shortage of opinion about the direction of the markets, and the case can be made either way by comparing current market trends to that of the past.

So, depending on your reference point, markets are either poised to surge, or crash! Times like these are worth re-emphasing the fundamental approaches to investing. Take a longer term view, stick to quality and remain diversified. Our approach is to actively move exposures however we will continue to retain core holdings through the cycle and try to minimise the dependence on timing entry and exit points.