Monthly Commentary: May 2022

26 Aug Monthly Commentary: May 2022

Global equities – rate fears return

Global equity returns dropped back in April as fears of aggressive U.S. interest rate increases, China’s COVID-induced lockdowns and the ongoing war in Ukraine conspired to dent sentiment – despite still broadly solid global economic growth and corporate earnings.

The MSCI All Country return index declined by 6.5% in local currency terms after a rise of 2.6% in March. Due to weakness in the Australian dollar, the decline in unhedged global equities was limited to 2.5%.

Forward earnings continued to grow, rising by 2.1% in the month with current market expectations consistent with further growth of 5.2% by end-22 and 8% over 2023. Accordingly, it was the PE ratio that again drove equity prices lower, falling from 16.7 to 15.6. – to be now broadly back in the range of the pre-COVID period since 2013.

Helping push valuations lower was a further notable lift on bond yields, with the yield on U.S. 10-year bonds rising from 2.34% to 2.93%. As a result, the earnings yield-to-bond yield gap (EBYG) fell from 3.6% to 3.4% – or the lower end of its range of recent years.

In terms of broad trends, the relative performance of the U.S. market appears to be weakening more clearly, in line with under-performance of growth versus value. Emerging markets overall also remain in a relative performance downtrend, while the Australian market has displayed outperformance in recent months. Broadly speaking, commodity-related exposures are doing best at present while growth/technology remains under pressure – consistent with current global inflationary pressures and the upward move in bond yields.

Global equity trends

Reflecting commodity price gains associated with the Russian invasion of Ukraine, commodity-related exposures such as energy, food and gold miners retain the strongest relative performance trends among hedged global equity ETFs. Technology/growth – and to an extent quality due to its current technology exposure – have the weakest performance trends.

Among unhedged exposures, cybersecurity has enjoyed the strongest relative performance in recent months, though had a setback in April. Most other technology thematics remain under pressure with more defensive exposures such as UK stocks and global income holding up better.

Australian trends

Local resource stocks suffered a setback in April but retain the strongest relative performance trend among key Australian equity ETF exposures. Local technology stocks dropped in line with the global technology sell-off last month and retain the weakest relative performance trend. Australian financials continue to hold up reasonably well, and are performing notably better than their global counterparts.

This article was originally produced by David Bassanese from BetaShares you can read the full article here.

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