The Fed has made a move, increasing the US cash rate by 25 basis points with another 6 rate rises planned for the year. Philip Lowe of the RBA is maintaining his “prepared to be patient” rhetoric, however that hasn’t stopped the 90day rate doubling in the past 3 months (to 0.16%) and 10 year bonds up over 50% (to 2.4%).
2022 has not been a good year for the global financial market, we saw a wash off on stock in January and February due to the rising inflation and pricing in of interest rate rises and once that was all priced in, we had Russia invade the Ukraine which has put even more strain on goods, mainly wheat and energy (oil, gas, coal).
The Australian dollar is up against the currency basket, which is mainly due to falling currency values in Europe however has held steady against the US dollar. However, it is quite possible if the RBA doesn’t move to increase our cash rate our dollar will fall against the US putting pressure on import costs and therefore inflation.
Australian Cash
As discussed we have seen the 90 day bank bill rate more than double as it went from 0.7% up to 0.16%, however looking into the futures market we can see that it is expected for the 90day bank bill rate to be more than 2% by mid-2023.
This is a good thing for people using the FHSSS as the rate of return is the 90day bank bill rate + 3%, however it also means we could be in for a sharp increase on mortgages.
Bonds have taken a nose dive over the past few months aswell, and this is because we are expecting yields to rise, therefore if you had a fixed 10 year bond with a coupon worth 1%p.a it’s face value will halve if the current rate for a 10 year bond rises to 2%p.a coupon.
(this is also why I explain to my clients that the traditional way of investing (The Modern Portfolio Theory) is broken as Bonds and Equities are no longer negatively correlated.
Even though I believe we will see the Aussie fall against he US if the RBA doesn’t move, some forecasters believe the Aussie will hit 77 to 80cents by the end of next year as we continue to see commodity exports boom from Australia. (the RBA’s commodity price index was up 23% form last year).
Property and REITs
Office space as expected has taken a big hit, however we are starting to see things improve with Sydney occupancy 18% off pre-covid levels and Melbourne 15% off. However, it is unsure if we will ever see this return to previous levels given the amount of people that have fled the cities for WFH arrangements in the ‘burbs and country. Vacancy rates are beginning to fall aswell with commercial at 9.9%.
Commercial and industrial property still remains a good hedge against inflation and the looming interest rate rises as the falling vacancy rates will help to keep lease values growing.
Residential property has potentially seen it’s peak after an eye watering jump over the past couple of months, it seems the tightening of lending restrictions (by way of increasing the stress test) didn’t have too much affect on borrowers, however the prospect of very real interest rate rises seems to have done the trick.
Sydney alone saw 1 in 10 houses sold at a discount (to current market), and Brisbane is starting to see houses sit on the market longer than a week.
Though we don’t expect to see property prices cash, we do believe the silly prices of the last 6 months was only a temporary spike and we will see that removed. (so potentially 20% fall from February values). One thing that will help keep property prices afloat however (apart from councils slow land approval process) is the lack of construction materials for new home builds. Australia from 2020 already could no keep up with structural pine demand for new home and renovation builds, so they started to import structural pine and hard woods from Scandinavia countries.
It is understandable we could see delays in this area, but also with the huge demand for repairs due to the floods it could be over a year before we start to see supply normalise and start to bring down prices.
It is probably an important time to review your General Insurance policy; is your home insured for how much it would cost to rebuild in the current environment? A low set 4 bedroom house will cost around $300,000 to build. Review your insurance now so you don’t risk getting caught out.
Australian Equities
Australian shares have faired quite well compared to the MSCI given we are naturally heavy resources and banks. The ASX 200 is only down 2.6% when taking into consideration dividends, however this is made up of Resources and Utilities which were up 6.2% and 6.1% respectively. Banks only fell 1%, and should start to benefit from rising rates as it will lead to improved margins. IT was the major sell off area (much like the NASDAQ in the US) with a 24% fall with the likes of Xero and Zip wearing the brunt of it.
Australian Equities look attractive moving forward though with upside for banks and insurance as interest rates climb; the demand for resources isn’t going away either so we could continue to see darlings like Whitehaven and Pilbara continue to grow.
Grain Corp had a fantastic year last year and was positioned “overvalued” however given the constraints on global grain supplies it could be in for another profitable year and could provide a hedge against 2 minute noodle prices. (not actual financial advice).
International Equities
As discussed the MSCI has had a rough patch with a fall of 7.8% before the invasion, and a further 5.2% since then.
The S&P is down 12.4%, Nikkei (Japan) is down 12.3% and the FTSE is down 9.8%, however we have some Countries do well out of this with commodity markets rising we saw Brazil post a 15.9% gain.
It is hard to tell what is going to happen to the global market in the short term; Russian is putting a big question mark over it all, as we don’t know what Putin will do next. Russia is slowly bleeding from a fiscal sense given they are selling their crude at a $28 discount to the market, however India is still buying all of it up and they defended their position in the summit as they need to look after their own economy too.
Though the future might be a bit unpredictable at the moment, a lot of professional investors are still sitting overweight equities, as though it is uncertain, with the alternative being bonds, it is mostly likely a calculated risk of the unknown.
Funded Futures Balanced Income portfolio has returned a -1.73% over the last three months with the 12 month sitting at a respectable 8.59%. January to March 2020 continues to be our worst three month period with a negative 9.28%, however it was off the back of our strongest 12 month of 17.82%. (5 year average of 7.74%)
Information and data provided by Morningstar, Morningstar Research, March 18, 2022. For a full version of Morningstar’s Economic Update please visit 286609 (morningstar.com.au)
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