Market roundup: Continued global uncertainty, but increasing share market stabilityMarket roundup: Continued global uncertainty, but increasing share market stability

This month, we’re joined by Sherifa Issifu, S&P Dow Jones Indices’ Index Investment Strategy Associate, Scott Phillips, The Motley Fool’s Chief Investment Officer in Australia, and Brendan Doggett, Sharesies’ Australia Country Manager.

What’s been happening in the Australian share market?

Sherifa Issifu (S&P Dow Jones Indices)

After stumbling in the first two months of the year, Australian equities sprinted in March, rising 7% to post a positive total return for 2022’s first quarter. The S&P/ASX 200 is now in striking distance of a new all-time high, finishing the quarter less than 2% away from a milestone.

March’s rebound wasn’t enough to save the S&P/ASX MidCap 50 and S&P/ASX Small Ordinaries from a negative quarter, with the indices declining 3% and 4%, respectively. Both have a higher allocation to information technology companies than the S&P/ASX 200, and “big tech” had a bad start to the year. Interestingly, large-cap financial companies gained, while mid and small-cap companies in the same sector waned. 

Scott Phillips (The Motley Fool AU)

When the combination of war in Ukraine, surging inflation, and the risk of higher interest rates were capturing the share market’s attention, its usual short-sightedness kicked in. All that investors could see, imagine, and focus on were the downside risks. But eventually, investors started to realise that the pessimism was perhaps slightly overdone.

The result was a move back to shares in general, particularly ‘growth’ shares, with technology companies surging during the month. True, many are still meaningfully below the prices of late 2021—but for now, the fear seems to have receded as some investors remember that the value of the market should owe more to value creation over the next 10 years rather than just the worries of the next 10 days.

Brendan Doggett (Sharesies)

The Australian economy has been recovering in this somewhat post-COVID lockdown era that we are now in, with spending picking up following Omicron. Inflation has increased in Australia, but it remains lower than many other countries. The resilience of the economy is reflected in our local share market. 

This isn’t to downplay the seriousness of what’s happened in Australia across the last month, including the horrific flooding that occurred following the record-breaking rain. While we’re still a far cry away from the roaring bull market we experienced in 2020 and 2021, the Aussie share market performed relatively well compared to the start of the year, and it’s encouraging to see lower levels of volatility.

What’s been happening in international share markets?

Sherifa Issifu (S&P Dow Jones Indices)

Although January and February saw steep declines in global share markets, most saw a partial rebound in March. The New Zealand share market ended March higher, but the last-minute dash wasn’t enough to erase the S&P/NZX 50 Portfolio’s loss of 6% for the quarter. The S&P 500® was amongst the stragglers, gaining 4% in March but still sitting at a half correction, with a loss of 5% for the year as of March’s close. 

Market expectations of future volatility aren’t quite back to “normal” levels. Short-term VIX® appears to be ticking down on tentative signs of easing geopolitical tensions from the Russia-Ukraine conflict. In contrast, the longer-dated Cboe S&P 500-based 1-Year Volatility Index remains well above its longer-term average and has been steadily creeping up since June last year, suggesting undertones of risk in markets.

Scott Phillips (The Motley Fool AU)

While it’s true that the performance of the Australian share market owes a decent amount to local circumstances and expectations, it likely owes more (at least in terms of the impact on sentiment) to global machinations. That’s almost always true, but those macro factors seem even more amplified than usual, given the continued uncertainty globally. 

While the Reserve Bank of Australia has hinted that interest rate rises are on the way in a few months’ time, the US equivalent, the Federal Reserve, has signalled very clearly that as much as 1 percentage point could be added to their central bank interest rate in as little as three months. And that’s because of the risks of runaway inflation.

Higher interest rates usually negatively impact asset prices—and ongoing inflation eats into the earning power of most companies. These two factors are rightly worrying investors and seem to be driving a rotation from growth stocks to value stocks. Whether that continues may come down to how long high inflation rates persist and how much investors are prepared to pay.

Brendan Doggett (Sharesies)

Russia’s invasion of Ukraine carries on, and while the financial markets have settled down a bit, there remains the ambiguity of what future financial and economic impacts lie ahead. What’s more, commodity prices remain high, including petrol, which is a much-lamented topic globally, and other goods Russia and Ukraine export like fertiliser and wheat. There are concerns that food prices may rise from this. 

All this continues to contribute to the high rates of inflation we’ve been seeing over the last few months. We also see more central banks moving to scale back economic stimulus and tackle inflation. There are eyes on what will happen in New Zealand, with many predicting another increase. 

Still, it’s encouraging to see that compared to the first two months of the year, March brought more stability and positive returns to global share markets.

Are there any key themes or trends you’re seeing?

Sherifa Issifu (S&P Dow Jones Indices)

In March, we released our latest SPIVA report, which shows that in the long run, active fund managers as a collective struggle to outperform the benchmark and that finding skilled active fund managers who consistently outperform is difficult. Over the past decade ending in 2021, 80% of Australian general equity managers underperformed the S&P/ASX 200.  

When compared to peers, Australian domestic managers as a group have performed better than international equity managers—with the latter delivering a 93% underperformance rate—versus the S&P Developed Ex-Australia LargeMidCap over the same period. 

Scott Phillips (The Motley Fool AU)

Trends can be useful, but they can also be deceiving because, by the time they’ve become apparent, they’re often already reflected in share prices.

For example, by the time investors are asking, “How can I play the theme of high oil prices” energy company shares have usually already climbed. Investors might be better served to think like contrarians (for example, the right trade at the end of February was to buy tech companies before the rush started). But not all trends reverse, and you can be too early—sometimes by a long way. 

That said, investors who expect inflation to persist might consider how higher costs could impact different companies. For example, commodity industries might be hit by higher costs but could have limited opportunities to pass them on through higher prices. Companies with strong competitive advantages, such as quality brands or monopoly positions, might be in better places.

Brendan Doggett (Sharesies)

Many of our investors are thinking long-term and are largely consistent in their buying and selling activity. It’s important that any investor consider their current circumstances and risks when reviewing their investing strategy, especially through all that 2022 has thrown at us so far. But for those that are fortunate enough to do so, we do like to see when they’re sticking to their long-term goals even through moments of uncertainty and volatility. In terms of common trends for what our investors are investing in, we’ve seen interest in different resource options, such as lithium. Tech businesses also remain a big interest, like Tesla and Apple. 

Wrapping up

That’s all for this month’s roundup. If you’re on the lookout for more resources to help you learn about investing, check out our Learn articles and subscribe to our Lunch Money market newsletter. 

Scott Phillips, The Motley Fool Pty Ltd (The Motley Fool) and S&P Dow Jones Indices LLP (S&P Dow Jones Indices) are not associated with Sharesies AU Pty Ltd or its related companies. Views expressed by Scott Phillips, The Motley Fool, Sherifa Issifu and S&P Dow Jones Indices are their views, and Sharesies does not endorse the views they represent. If any financial product or stock has been mentioned, you should obtain that product's disclosure documents prior to any decision whether to acquire the product. Information provided is general only and current at the time.