Quarter in review: March 2022
The March quarter delivered a positive return of 1.5% in a volatile market marked by surging inflation, rising rates expectations and the escalation of the Russian invasion of Ukraine.
The best performing sectors were Energy (+29.6%), Materials (+16.6%), and Utilities (+14.1%). Fundamentally, all three were propelled by the invasion of Ukraine with Western nations refusing to purchase Russian commodities causing substantial price rises. The steepening yield curve caused growth sectors to underperform over the quarter with worst performing sectors being IT (-13.6%), Healthcare (-10.0%), and Consumer Discretionary (-10.0%). IT sold off as investors shied away from suspect business models, with a significant derating in loss- making and high PER multiple names. Healthcare sold off given the stronger Australian dollar and disappointing updates from some of the Covid beneficiaries. Finally, Consumer Discretionary performed poorly as investors questioned the implications of rising inflation on households, as well as an increasing shift in spend from goods to services as the economy reopens.
The key drivers of the market were:
- Australian Economy: Despite being confronted by the Omicron variant to start the quarter and subsequent floods in QLD and NSW, the reopening of the Australian economy meant economic data remained strong. Retail sales were above expectations, posting +1.8% for February, albeit forward looking consumer sentiment slumped. Pleasingly, we’re seeing 14-year low unemployment at 4.0% while household balance sheets are robust. However, rising inflation has brought forward expectations of interest rate increases – the AUS 10-year interest rate quickly rose by 117bps to 2.84%. The quarter end featured the pre-election Federal Budget which saw a temporary cut to the fuel excise tax, a $250 payment to pensioners and welfare recipients and a $450 tax rebate to low- and middle-income earners, mainly to abate cost of living pressures for households.
- Commodities: Significant fiscal stimulus has led to a huge demand shock for the global economy and for commodities. The invasion of Ukraine which has further exacerbated the rise in commodity prices with Russia producing 10% of the world’s oil production, 20% of battery grade Nickel, 40% of the potash market and 35% of wheat production. Oil prices were up 30%, Lithium Spodumene was up 98%, Wheat was up 31% whilst Nickel was up 61%.
- Global Markets: The global indices were laggards relative to Australia over the quarter, with the S&P500 (-4.6%), the NASDAQ (-8.9%), and the MSCI EM (-7.0%). Australia’s index leadership was largely explained by being overweight commodities, as well as fund inflows from offshore investors.
- Reporting Season: The Fund had a busy reporting season as company numbers skewed positively (52% surprised, 26% disappointed and 22% in line). This also translated to stronger expectations for FY22 earnings being revised up 2%. While many reporting companies saw strong top line growth, the operating environment for many companies going forward remain uncertain. These questions extended to both strategy (navigating cost inflation and supply chain issues), and implications on financials (working capital management and capital allocation). Interestingly, we also observed lacklustre guidance from pandemic beneficiaries that saw violent share price declines as the market questioned the sustainability of their strong financial performance post-Covid.
- M&A/ECM: After over 250 IPOs in 2021 we saw very the few IPOs in the first quarter, most were primarily limited to the resources sector as investor fatigue set in. On the M&A front we saw a $3bn takeover bid for Uniti Wireless, a dismissed takeover bid by Brookfield and Cannon Brookes for AGL (with the AGL Board preferring to demerge the company), IGO made a bid for nickel producer, Western Areas which was rejected but is ongoing and finally Charter Hall bought 50% stake in Paradice Investments and also entered into a partnership bid $1.3bn for Irongate property group.
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