Mark Lister, 2 August 2022
Investors will be pleased with the way most asset classes performed in July, as optimism returned to financial markets and shares and bonds alike posted solid gains.
The MSCI All Country World share index rose 6.6 per cent, its best monthly performance since November 2020. The US market was one of the strongest, with the S&P 500 up 8.5 per cent in July and the Nasdaq surging 11.7 per cent.
Both these indices have been under pressure in 2022, but they have rebounded 12.6 and 16.4 per cent from their respective June lows. That sees the S&P 500 13.9 per cent below its all-time high from January, having been down 23.6 per cent at one point.
Europe and Australia were also very buoyant, rising 8.0 per cent and 5.7 per cent during July, while the local NZX 50 increased a healthy 5.7 per cent, making for its best monthly performance since April 2020.
Conservative assets also performed well, with fixed income and bond prices increasing as longer-term interest rates fell.
The US 10-year Treasury yield declined from 3.01 to 2.65 per cent during April, while the five-year swap rate in New Zealand finished the month at 3.55 per cent, down from 3.98 per cent.
This saw the NZX Corporate Bond index gain 2.0 per cent in July, its best monthly performance since April 2020 (and before that 2009).
The strength came in the face on ongoing inflationary pressures.
It was reported in July that The New Zealand consumer price index rose at an annual pace of 7.3 per cent in the June quarter, above expectations and the biggest increase since 1990 (or 1988 if we exclude times when GST was hiked).
Those figures pale in comparison to what we are seeing in other parts of the world, with the headline CPI in the US currently running at an annual rate of 9.1 per cent, and the UK and Europe not dissimilar with 9.4 and 8.9 per cent.
In response, central banks have continued to tighten monetary policy. During July, the Reserve Bank of New Zealand hiked the Official Cash rate by another 0.50 per cent, taking it to 2.50 per cent, the highest since 2016.
In the US, the Federal Reserve increased the Fed Funds Rate upper bound by another 0.75 per cent, taking it to the highest since mid-2019.
Central banks in Australia the US and Europe also increased policy rates during July, and there is more to come.
Despite these moves, financial markets are becoming increasingly hopeful that policymakers will change their tune in the months ahead and ease off.
Cracks have appeared in the global economy and this is being perceived as good news, on the basis it might deter central bankers from moving too quickly for fear of causing an economic downturn.
That’s seen longer-term interest rates fall (even though cash rates are still going up), which has given a boost to asset prices like shares and fixed income.
However, it remains to be seen whether this is wishful thinking or not. Inflation is still very high, and central banks are still acutely focused on dealing to it. A slowing global economy might simply add further risk to the equation, rather than make policymakers change tack.
We see some encouraging signs on the horizon. Commodity prices have fallen from their highs, while pricing intentions and supplier delivery times have stopped getting worse. The international reporting season has been comforting, with many quality businesses have delivered resilient results.
Nonetheless, we still believe it is a time for caution and wide diversification, as well as a focus on quality and income generation with a defensive tilt.
After the very strong rebound of the past six weeks, this might also be a good time for investors to do any portfolio fine-tuning they have been putting off.