Quarter in review: June 2022
The June quarter saw the ASX300 Accumulation Index delivering a return of -12.2%, marking a weak period for equities as tighter monetary conditions led to concerns towards a potential economic recession. The key market drivers for the quarter were:
- Sector Performance: The best performing sectors for the quarter were Utilities (+1.7%), Energy (+1.2%) and Healthcare (-2.2%) as investors moved to defensive sectors amidst high market volatility. The worst performing sectors included Information Technology (-26.3%), Real Estate (-17.5%), and Materials (-16.6%). The underperformance in Information Technology and Real Estate can largely be explained by rising rates expectations resulting in PE multiple compression. Meanwhile, Materials declined due to softening demand brought upon by the Chinese lockdowns.
- Australian Economy: The quarter saw the start of the interest rate tightening cycle in Australia as the RBA delivered a 25bps hike in May and 50bps in June. Compounding this was the RBA’s forward intention for further hikes to temper inflation. This led to bond markets lifting the Australian 10-year yield up 82bps to 366bps. While the current health of the economy appears solid with the unemployment rate low at 3.9% and strong retail sales data, aggressive hikes could exacerbate the risks of an economic recession. This was reflected in forward looking indicators such as consumer sentiment which has fallen to its worst levels since the beginning of the pandemic, a powerful signal given consumption typically drives around 60% of Australian GDP.
- Australian Election: As expected Labor was given a majority in the House of Representatives whilst the Senate will be controlled by the Greens and Independents. The new PM, Mr Albanese has focused firstly on foreign policy with numerous trips offshore as he navigates the geopolitical tightrope. The major domestic policy changes will be in climate change, aged and childcare plus a jobs summit in September. The lack of immigration growth remains a key concern of Australian corporates.
- Commodities: Iron Ore was down 21.6% for the quarter. This was a consequence of major consumer China’s strict Zero COVID lockdowns which effectively stifled economic activity, albeit restrictions started easing near the quarter end. Brent Crude was up 6.4%, having run heavily in the month of May before tempering back to close the quarter as the EIA reported a build in US crude inventories, as well as a potential recession easing on demand. The deteriorating economic outlook was also reflected in the Copper/Gold ratio which retraced 15.7% during the quarter.
- Global Markets: All global indexes declined to varying degrees during the quarter in response to “higher than expected inflation” and aggressive cash rate rises from central banks globally. Relative to the ASX300, USA underperformed with the S&P500 (-16.1%) and the teach-heavy NASDAQ (-22.3%). On the other hand, emerging markets slightly outperformed with the MSCI EM (-11.4%).
- M&A/ECM: As markets retreated so has the activity in IPOs whilst M&A has remained healthy. Over the quarter we saw Ramsay Healthcare received a conditional, non-binding, indicative proposal from a KKR consortium at $88 per share. We also saw Resmed acquire Medifox Dan, an out of hospital software solutions business from private equity for US$1b cash, for US$35m of EBITDA, effectively 28x EBITDA. IFM took at 15% stake in Atlas Arteria but was knocked back by the board to provide non public information without a takeover bid. Demerger of Tabcorp separating the lottery and media/racing assets finally occurred whilst Woodside took control of BHP’s energy assets. Finally Morrison and Brookfield made a $3.7bn takeover bid of Uniti Group at just under 28x EBITDA.
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