The month that was...

May was all about the Federal Election, as another three years expired, and Australian’s went to voting booths again. In the end, the betting odds and polls were extremely accurate, with the Australian Labour Party regaining Government for the first time in nine years.

Whilst the result was as expected, with the ALP likely to have a working majority, the process was far from straightforward. The major parties hit a low ebb receiving just 2/3rds of all votes cast, as the Greens and Teal Independents dominated flows and won more seats than expected. The message to government is loud and clear, the people want more action on climate change and greater policy certainty.

China has borne the brunt of the market selloff in 2022, somehow experiencing more volatility than the tech-focused Nasdaq index which has entered the bear market territory.

The drivers have been threefold, the first being regulatory concerns following the Ant Financial IPO and subsequently, the threat of sanctions should the country decide to support Russia following their invasion of Ukraine.

More recently, however, the lockdowns in both Beijing and Shanghai have been a major drag on global economic activity with a significant amount of goods travelling through their domestic ports.

The continuing role of China in the global supply chain has been underestimated, and the impact this is having on inflation.

Thankfully, lockdowns are ending and the government has confirmed a renewed focus on stimulus, suggesting the region may well be ready to bounce.

There remains a real threat that they could tighten policy too harshly, particularly given a backdrop where consumer staples goods like grain and petrol are jumping in price and likely causing demand destruction on their own.

This comes with the backdrop of a reversal of government policy support. Signs then, that US inflation could be peaking were welcomed in May, with US inflation data coming in below expectations, as both used care and fuel prices took a breather. There is a growing feeling, among some experts, that the current prediction of a 3 per cent cash rate, which would result in a 7 per cent mortgage rate, may be well ahead of what really occurs.

The big bad bear has awakened in 2022, with both bond and equity markets nearing what is known as a ‘traditional correction’. The definition of a correction is a fall of more than 20 per cent in the market from top to bottom, with the Nasdaq still down 24 per cent for the year at the time of writing. The S&P500 is down 14 per cent and the Dow Jones 10 per cent with the old-fashioned nature of these indices contributing to the outperformance. Specifically, the S&P500 has seen a surge in the allocation to energy companies to close to 5 per cent.

The big story has been that some 50 per cent of profitless technology companies have fallen by more than 50 per cent over the last 12 months as a higher cost of capital threatens long-term growth plans.

With this as a backdrop, Australia has seemingly been the biggest beneficiary of the war in Ukraine and a surge in volatility as all roads lead back to commodities. As key grain and gas exporters, the world is suffering from a supply shortage, with Australia one of the few countries able to respond. The result has been a significant outperformance from the energy sector, which has gained 31 per cent in 2022, alongside utilities, up 24 per cent, being two of the few positive lights in the year to date.

Technology continued to be sold off during the month, with investors concerned about valuations, falling 8.7 per cent and taking the year to date fall to 30 per cent. Whilst there is likely to be a bottom, the lessons of the last few months have highlighted that even companies that have fallen 70 per cent can fall another 30 per cent.

In this environment, it is naturally difficult to be patient and for one to want to make changes to underperforming investments. Yet more than ever, staying the course and focusing on your strategy remains more important than ever.

Strategic asset allocation and remaining exposed to investment markets is the key to compounding and making sideways shifts in most cases simply act to increase costs. The global economy, facing higher interest rates, all but sits on a precipice between a recessionary environment and an extended period of lower than average growth, with technology potentially benefitting from the former. The key to watch will be whether central banks are able to keep up with their current forecasts for interest rate hikes as any deviation will be good for sharemarkets.