Market update
The table below provides details of the movement in average investment returns from various asset classes for the period up to 31 May 2023.
| Asset class (% change) | 1 month | 3 months | 1 year | 3 years
(% pa) |
| Australian shares | -2.5 | -0.9 | 2.9 | 11.4 |
| Smaller companies | -3.3 | -1.3 | -5.8 | 4.5 |
| International shares (unhedged) | 1.2 | 8.4 | 13.4 | 11.9 |
| International shares (hedged) | -0.2 | 4.0 | 3.2 | 11.7 |
| Emerging markets (unhedged) | 0.4 | 4.4 | 1.4 | 4.4 |
| Property – Australian listed | -1.8 | -3.8 | -3.6 | 8.1 |
| Property – global listed | -3.8 | -5.4 | -14.8 | 3.8 |
| Infrastructure – global listed | -5.1 | -1.2 | -11.1 | 4.0 |
| Australian fixed interest | -1.2 | 2.1 | 1.7 | -2.8 |
| International fixed interest | -0.5 | 2.0 | -2.6 | -3.4 |
| Australian cash | 0.29 | 0.89 | 2.64 | 0.91 |
Past performance is not a reliable indicator of future performance.
Overview & Outlook
The US Senate has passed bipartisan legislation that lifts the government’s debt ceiling thereby avoiding a catastrophic US default scenario. The legislation will have two impacts, first, the spending caps agreed as a condition to pass the legislation would imply a fiscal tightening and thus a 0.2% – 0.3% drag to the US GDP. Second, the legislation will see the US Treasury will move to resume bond issuance which will tighten liquidity in the short term.
Treasury General Account
Source: Fed Balance Sheet & Lending Data – updated as of 31/05/2023, AMP
As the Treasury issues bonds, liquidity will decline potentially increasing volatility. A further impact may be upward pressure on yields. The market continues to express concern over the US Federal Reserve’s ongoing cash rate hikes aimed at combating inflation. Whilst many of the market participants expect the US is at the peak of the interest rate cycle (5.25% since the 3rd of May), expectations of a further rate hike are attributable to the recent employment data showing a stronger-than-expected increase of 339,000 in payrolls. Overall, the job market appears to be cooling while remaining tight. Fed Vice Chair designate Jefferson suggested that the Fed is not planning to raise rates in June but emphasised that a pause does not imply reaching the peak. Market expectations currently indicate a 12% chance of a 0.25% rate hike in June and a 64% chance of a hike in July.
In June, the Reserve Bank of Australia (RBA) raised the cash rate from 3.85% to 4.10%. The rationale for this is the uptick in April’s consumer inflation data, which increased from 6.3% to 6.8% year-on-year. Additionally, the Fair Work Commission’s decision to raise minimum award wages by 5.75% per annum starting from July 1, with an even larger increase of 8.65% per annum for those on the minimum wage, was also a factor in the RBA decision. This increase is only 11% of the national wage bill and is applicable to 20% of the workforce. The RBA’s statement also highlighted recent increases in public sector wages and anticipated further wage growth as factors contributing to the decision to increase rates.
Concerns regarding the recessionary risk in Australia are increasing, as various indicators suggest a weakening economy. These include a slowdown in retail shares, a rising unemployment rate and a collapse in building construction. Additionally, the bond market also has a view that a recession is likely. The narrowing spread between the Australian 10-year bond yield and the 2-year bond yield serves as a warning sign of heightened recessionary risk.
Australian yield curve inversions and recessions
Source: Bloomberg, AMP
Share markets
Last month, international shares gained 1.2%. However, investors remain cautious as the year-to-date performance of the US equity market has mainly been driven by a few sectors, including Technology, consumer services, and consumer discretionary, rather than the rally being broad-based across sectors. This narrow market advance is further evidenced by the S&P 500 index which has returned around 10% year-to-date, while the equal-weighted index version has declined 0.63%. A market rising on the outlook of only a small sector of the equity market is indicating that the gains may not be sustainable. (see below chart) The gains in the S&P 500 are largely attributed to mega-cap tech companies like Meta, Tesla, Microsoft, and Apple, benefiting from the excitement surrounding artificial intelligence (AI) and investor expectations, perhaps overdone, on its potential upside for corporate earnings.
Source: MorningstarDirect, AMP
Notable in this rush for AI exposures is Nvidia, a semi-conductor or chip producer has been a standout performer, with its share price increasing by 90% year-to-date, reaching a market value exceeding $1 trillion. Nvidia’s success can be attributed to its position at the forefront of the AI evolution, as it develops and deploys cutting-edge semiconductors that enable new applications and uses of advanced technologies across various industries.
The Japanese equity market is a standout market globally and continues with a 6.4% gain in May and 22% year-to-date. This is attributable to easy monetary policy, mild inflation, and relatively cheap equity market valuations on a number of valuation metrics.
Fixed Interest markets
Australian fixed interest recorded a return of -1.2% over May due to the surprise rate hike by the (RBA) in that month. This unexpected decision led to a shift higher in the yield curve and contributed to the negative return for Australian fixed interest investments. The 10-year benchmark yield rose 40 basis points during the month.
International fixed interest returns also faced challenges, with a negative return of 0.5%. In the United States, the 10-year yield witnessed a jump of 25 basis points as the market began to perceive a higher likelihood of further rate hikes by the Federal Reserve. The market remains cautious as to the outlook for inflation and importantly, where it settles i.e., its long-run level.
Property & Infrastructure
In May, both global REITs and the global listed infrastructure (‘GLI’) sector experienced setbacks, with G-REITs returning -3.8% and the latter returning -5.1%. These losses were primarily driven by the impact of rising interest rates noted above and, for GREITs in particular, slowing economic growth. Moreover, G-REITs face the additional hurdle of low occupancy rates resulting from the work-from-home changes, and if this change remains in place over the long term, property valuations and cash flows continuing to be weaker than expected.
In Australia, the uncertain valuation of private commercial properties is influenced by the performance of A-REITs, which will affect the upcoming revaluations. There is scepticism about unlisted property valuations, but there are limited transactions to ascertain the extent of valuation declines.
Global listed infrastructure continues to display positive long-term prospects, benefitting from trends such as asset renewal, energy transition, digitalization, and urbanization. Furthermore, it also demonstrates resilient cash flows and offers inflation protection when compared to other asset classes hence its relatively good performance in the real asset sector.
