The Month That Was...

Global sharemarkets looked to have bottomed in June as markets began to digest the implications of the Federal Reserve’s aggressive monetary policy action. Comments from Governor Jerome Powell during the annual Jackson Hole Summit reversed the recent positive trend as he all but denied growing expectations that the central bank would be forced to cut rates in 2023 or 2024 if the economy slows as expected.

The result was a broad selloff in both bond and equity markets during the month, once again led by the techheavy Nasdaq which dropped 4.6 per cent. It remains to be seen whether aggressive commentary will keep up with policy action, as a similar albeit reverse approach was applied to support the economy during the pandemic.

The Australian sharemarket has once again remained resilient against the global selloff, as the S&P/ASX200 actually gained 0.6 per cent for the month. It was the same story that has dominated various periods of 2022 and is likely to continue for the foreseeable future, with concerns about the supply of energy and commodities resulting in a surge in oil, gas and other prices.

The energy sector was up 7.4 per cent and materials 3.9, with the lithium sector also benefitting from the change in government and the potential mandating of electric vehicle sales in Australia. The property sector was the biggest detractor, with higher bond yields, struggling construction companies and growing vacancies putting pressure on valuations, just as debt costs increase.

June economic growth data was released just as this report was being published, which once again exhibited the strength of the domestic economy. While slightly below expectations, growth of 0.9 per cent for the quarter and 3.6 per cent for the year are likely to support continued central bank rate hikes.

The driver of the strong growth remains strong exports of commodities but also a continued recovery in household consumption, with restaurants and cafes among the biggest beneficiaries. That said, it remains highly varied across the different parts of the retail sector with lower cost, commodities discount retailers not fairly nearly as well as the premium, luxury groups in most cases. The impact of rate hikes is only just beginning to be felt by borrowers, so it is clear that the worst is yet may be yet to come.

This brings the aggressive action of the Reserve Bank of Australia into focus, with September seeing another 50-basis point interest rate increase. This takes the cash rate on which many loans are subsequently priced to 2.35 per cent, nearly double the level immediately before the pandemic. A growing chorus of commentators are questioning such aggressive moves, particularly given how highly leveraged the Australian household is and the variable nature of these mortgages. With inflation well below global levels, limited wage growth and a significant portion of the cost increases coming from global supply chains, only time will tell if the central bank is going too hard too soon.

Interestingly, they are seeking to find the ‘neutral’ level of the cash rate at which policy becomes less supportive of spending and consumption, though this is never known until after it has been reached. While many predicted the toughest reporting season in several years, the results for Australia’s largest companies were significantly better than expected. Across 132 companies the average increase in revenue was 10.6 per cent, with increasing prices due to inflation a key contributor.

Profits were 56 per cent higher at the end of the lockdown tailwind and 63 per cent of companies reported an increase. That said some 13 per cent have reduced cash holdings. In terms of dividends, outside of record payments from the likes of BHP and Fortescue dividends actually fell by 1.7 per cent with 27 per cent cutting their dividend.

The new Federal Government has wasted no time getting into action, announcing a number of Royal Commissions, Summits and similar meetings of relevant stakeholders. This combined with proposed changes to superannuation and financial advice laws, and it has been quite a busy period. The Jobs Summit stands out as having the largest potential impact on the economy and investors, albeit with little in the way of takeaways outside of a few ‘heads of agreement’ there is little to be concerned or hopeful of thus far. Of most interest to investors will be the impending passing of the Labor government's climate change bill which will seek to put in place long-awaited legislation and encourage businesses and consumers to move towards a more environmentally sustainable operating environment.

Once again, the headlines are telling a different story than the data itself, with media outlets highlighting a fall in home prices in August as the biggest ‘plunge’ in 39 years. The plunge was a 1.6 per cent fall in prices during the month with every capital city now in decline as the impact of higher interest rates slowly filters through the economy. This counters the significant jump that has occurred since the beginning of the pandemic but more than ever property prices remain very regional and individual marketfocused.

Among the most impactful events during the month was the release of the Quality of Advice Review Interim report. The review was established as a follow up to the massive change in legislation that came out of the Hayne Royal Commission. While the professional standards and code of ethics have been broadly welcomed by the industry, registered financial advisers have dropped from nearly 30,000 to just 16,000 in 2022. The key recommendations from the report are focused around reducing the compliance burden placed on advisers who presently must report the same fee as many as three to four times per year, with a single disclosure, limit the need to provide longwinded compliance-focused advice documents and ultimately change the duty of advisers to one of providing ‘good advice’.

Wattle Partners has welcomed the recommendations and believe they will be a positive for the industry and most importantly for clients, allowing advisers to focus on serving rather than on paperwork. 1.August couldn’t be closed with a mention of the meme stocks and crypto sector. Meme stocks referred to those being traded by new, retail investors during the pandemic in many cases sending shares up fivefold in just a few days before seeing them collapse. This month it was all about embattled retailer Bed Bath and Beyond (NYSE:BBBY) with a concerted effort to buy into the stock resulting in a significant jump in volatility. This once again highlighted the challenge of index or passive investing in some sectors, whereby the larger a company grows, the larger a position an index fund must hold.