The month that was...
Inflation, inflation, inflation (and interest rates). These were the only topics that mattered in April if you focused on the headlines. This despite extended lockdowns in China, war between Ukraine and Russia and an expanding energy crisis.
The Australian economy finally joined the global inflation party, reporting a 5.1 per cent rate in March, ‘surprising’ markets. In a world where energy prices are surging due to shortages, supply chains remain interrupted and borders are effectively still closed for international workers, it is only natural to see price rises due to external factors.
In Australia, the biggest contributors were fuel, the cost of housing and education, with the latter playing catch-up following a few years of subsidies. The trimmed mean inflation rate was significantly lower, 3.7, which excludes more volatile factors.
Whilst technically it occurred in May, the result of this inflationary outburst was unexpected and larger than predicted interest rate increase by the Reserve Bank. The cash rate was moved to 0.35 per cent from 0.10 per cent ending the ‘emergency settings’ in place since March 2020.
The RBA joined the likes of New Zealand, Canada and the US in appearing to ‘combat’ inflation by increasing the cost of capital, yet it remains to be seen whether such a blunt instrument will do anything at all to the current causes of inflation.
It may well be that the RBA and other central banks are seeking to lean into expectations that have seen the 10-year bond yield exceeds 3 per cent, to move rates higher and therefore have room to cut should the buoyant consumer eventually weaken. That said, central banks have a history of causing recessions, so anything is possible.
The Federal Election was called and will dominate headlines and news flow for months to come. Initial polls show a significant swing to Labor and a large majority; however, polls have said similar things for everything from Trump to Brexit and even the 2019 election. Warnings are already being made that a hung parliament could lead to market mayhem, or a swing in either direction will be great for one sector or company over another. These warnings should be taken with a grain of salt, as the change of government has rarely if ever, had a significant impact on the economic backdrop or the sharemarket.
Dispersion in sharemarket returns continued to grow, with a massive difference in returns across both sectors and countries. For instance, in the US the S&P500 is facing the worst start to a year in over 50 years after the Nasdaq fell 13 per cent in April alone. The Dow Jones, which includes more old-fashioned businesses like banks and energy companies fell just 4.9 per cent in April. China also faced a continued selloff as the COVID-zero policy hits confidence and sends more capital out of the country with both Beijing and Shanghai in lockdown. That said, given the track record of rebounding out of lockdowns, the country seems well placed on a longer-term basis.
Looking more closely at Australia and the story was quite straightforward, cyclicals win, growth loses. Whilst many attributed the performance to value stocks, it has really been beneficiaries of the massive disruption occurring in Europe, with energy gaining another 2.4 per cent in April but lagging the utilities sector which added 9.3 per cent to top the market.
The likes of AGL and Origin Energy continue to perform well as domestic energy and export prices continue to improve. Technology stocks continued their stratospheric fall, reminding investors that even companies that have fallen 50 per cent can fall another 50 per cent if they disappoint. Many of the most popular growth companies are trading 60 per cent below highs and are likely facing significant internal challenges. Quality continues to pay off, with consumer staples and healthcare also gaining 3.3 and 2.4 per cent.
It was another month of disasters across global markets with any sign of a slowdown, weaker forecasts or profit falls met with furious selling pressure. In Australia, the worst performing stocks were EML Payments, down 47 per cent, Megaport, down 37 per cent and Zip Co, down another 26 per cent. It was a similar story in the US, with even the mega-cap technology names feeling the heat, NVIDIA fell 33 per cent, Amazon, 25 per cent, Disney 20 per cent and Tesla, 20 per cent.
But the standout was the capitulation of Netflix, which reported the first fall in subscribers in over a decade, sending shares more than 20 per cent lower. They have now fallen 66 per cent for the year to date. In interesting news, Mark Zuckerberg founder of Facebook, now Meta Platforms, has experienced both the largest one day gain in net worth, and the largest single-day loss in net worth of any person in history in 2022.
Private market investments remain popular due to the lower correlation and volatility, the majority of which is driven by their lack of liquidity. There are signs that this is coming back to bite with news that the likes of Canva and other unlisted technology companies are facing devaluations in quarterly and annual updates. Despite this, private equity remains more popular and powerful than ever, with Ramsay Healthcare the top-performing stock in April after receiving a takeover bid from KKR for $20 billion. They join Virtus Health as healthcare companies underbids as private equity money seeks consistent growth and takes private opportunities.
Takeover remains the talk of the town, with the latest deal between Pendal and Perpetual expected to drag on, as both value managers seek relevance and cost efficiencies through scale. AGL is facing further pressure from billionaire Mike Cannon-Brookes who has amassed an 11 per cent blocking stake in the company as he seeks to stop the planned demerger of their production assets. But all eyes were on the US after Elon Musk, CEO of Tesla and the richest man in the world on any given day, fooled everyone by announcing his intention to take over Twitter and send the company private.