Economic Review

10 Feb

Economic Review

Global Equity Markets 
Global shares fell sharply in January. Investors became concerned about persistent inflation pressures, rising bond yields and the signal from the US central bank that higher interest rates are coming in 2022.

Wall Street made new record highs in early January given expectations for strong corporate profits and low interest rates continuing in 2022. However, the Federal Reserve (FED) then dented this optimism on January 6th by signaling that US interest rates could rise either sooner or at a faster pace. Inflation concerns then returned to prominence with US consumer price annual inflation for December at 7% being the highest since 1982. The subsequent FED policy meeting on January 26 confirmed this guidance that higher US interest rates are coming as well as confirming the end of government bond and mortgage securities purchases in March. US government bond yields rose sharply in response to this signal that monetary policy is set to become more restrictive.

European shares also fell sharply in January despite guidance from the European Central Bank (ECB) that low interest rates would be maintained. UK shares proved more resilient with a small gain in January given investor’s attention was more focused on Prime Minister Boris Johnson and his staff’s activities during covid restrictions.

Asian share markets delivered negative returns. The Chinese market fell given concerns over China’s economic slowdown and the financial weakness of property development companies such as Evergrande. Japanese shares also declined.

Table 1: Global share market performance – January 2022
US S&P 500 -2.2%
US Dow Jones -3.2%
Euro Stoxx 50 -2.9%
German DAX -2.6%
UK FTSE 100 1.1%
Japan Nikkei 225 -6.2%
China Shanghai Composite -7.6%
Source: Factset, financial data and analytics, January 2022

Australian share market review
Australian shares also had a disappointing start to 2022 with sharp falls in January. Leading the decline was the Information Technology sector which struggled in the wake of Wall Street reassessing growth prospects. Healthcare and consumer staples were also under selling pressure given that future higher interest rates would reduce their appeal to investors. The few rays of sunshine came from the Resources sector in January. The energy sector surged given the rapid rise in the oil price towards US$90 per barrel fueled by concerns over Russia – Ukraine political tensions. The big miners were also strongly supported as iron ore prices surged from US$107 to US$137 with reported shortages of Brazilian supply.

The Australian Dollar (AUD) fell by 3.1% against the US Dollar (USD), finishing the month at USD0.7046.

Table 2: Australian share market performance – January 2022
S&P/ASX 200 Accumulation Index -6.4%
S&P/ASX 200 Industrials Total Return Index -8.6%
S&P/ASX 200 Resources Total Return Index 3.0%
S&P/ASX Small Ordinaries Total Return Index -9.0%
S&P/ASX 200 A-REIT Total Return Index -9.5%
Source: Factset, financial data and analytics, January 2022

Large Caps (S&P/ASX100)
The surging gas and oil prices saw AGL (+15.6%), Woodside Petroleum (+14.3%) and Santos (+13.2%) as the best performers in December. Tech stocks were weaker as markets factored in the prospect of higher interest rates on valuations. Xero (-22.7%) was the weakest performer followed by Altium (-21.0%) and Wisetech (-20.2%).

Listed property
The S&P/ASX 200 AREIT Total Return Index posted a 9.5% decrease in January, below the 6.4% decrease in the S&P/ASX 200 Total Return Index. Industrial sector AREITs were the weakest sector (+8.2%) followed by Diversified AREITs (-10.1%), Office AREITs (-7.4%) and Retail AREITs (-5.5%).

Written 3 February 2022.

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