March 2022 Market Insights
March saw continued volatility in financial markets as the Russian war against Ukraine continued. Investors continued to process the repercussions of a drawn-out war on supply chains and oil, energy and commodity prices.
Written by Kevin Hua Co-founder & Chief Investment Officer
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What happened to the markets in March?
March saw continued volatility in financial markets as the Russian war against Ukraine continued. Investors continued to process the repercussions of a drawn-out war on supply chains and oil, energy and commodity prices.
Global equities ended March with its worst quarter in the last two years as the war in Ukraine puts inflationary pressure on commodity and food prices and forcing central banks to become more aggressive to counter inflation.
Economists at major banks are expecting that the fallout from Russia’s war in Ukraine could reduce global growth by 1% this year whilst inflation remains an ongoing issue. There are also growing concerns of stagflation — where inflation is high, and growth is low.
Longer term, the war in Ukraine has the potential to trigger a re-ordering of international relations that would reshape the economies of Western Europe as well as shine a spotlight on the relationship between China and Russia.
The majority of major developed markets rallied (in local price terms) with the strongest markets being Australia’s S&P/ASX 200 Index, up +6.9, Japan’s Nikkei 225 Index, up +4.88% and the U.S. S&P 500 Index, up +3.58% (all local prices).
Hong Kong’s HSCEI Index led the underperformers, being down -6.21% with China’s Shanghai Composite Index, down -6.07% shortly behind (all local prices) as investors worried about slowing growth in the country, continued lockdowns and ongoing regulation of the private sector.
The AUD continued to rally over the month (+2.96% versus the USD and +4.24% versus the EUR) which impacted returns on the portfolios’ exposure to international shares.
Interest rate hikes begin in the U.S.
The U.S. Federal Reserve raised interest rates by 0.25% (the first time since 2018) and signalled for more hikes at all six remaining meetings in 2022. Although a 0.50% hike was not undertaken, it may still happen in the future along with moves to reduce its current US$8.9 trillion balance sheet as it seeks to decelerate inflation toward 2% in the next few years.
The U.S. economy remains robust for now with another 431,000 jobs added in March and the unemployment rate falling to 3.8%.
Meanwhile, President Joe Biden said the U.S. will ban imports of Russian fossil fuels including oil, in an escalation of Western efforts to sanction Russia’s economy that will likely further strain global crude oil markets.
A balancing act for the European Central Bank
Inflation numbers for March in Germany and France rose to new records, while Spain's inflation rate rose to a 40-year record. These numbers suggest that the European Central Bank's 5.1% inflation forecast for 2022 may be too conservative and may cause monetary policy to tighten sooner.
The European Central Bank faces a fine balancing act of managing slowing economic activity triggered by the Ukraine war and the associated sanctions while trying to control inflation from rising commodity prices.
A challenging time for the domestic Chinese economy
China announced a gross domestic product growth goal of about 5.5% for 2022, which is its lowest target since 1990 but at the higher end of expectations.
Although Chinese President Xi Jinping has focused on stability for the Chinese economy, he is facing growing challenges domestically.
The economy is slowing, the housing market has liquidity issues, over-regulation has made investors wary, and the country’s Covid-Zero policy is causing multiple lockdowns with repercussions for supply chains as well as growing frustration amongst the population.
Lastly, the Ukraine war has put a spotlight on China’s close connections with Russia.
Commodity and tech stocks rebound in Australia
The Australian sharemarket rose +6.9% in March, driven by strength in Energy stocks and a rebound in Technology stocks. Strong commodity prices due to geopolitical tensions restricting supply are pushing Energy and Material stocks higher.
The Australian economy remains robust. March unemployment rate released by the ABS was steady at record low 4%. Home owners have enjoyed strong gains in house prices since late 2020, when the RBA cut interest rates to historic lows, buoying residential demand.
After extended periods of lockdowns in Australia since the onset of COVID-19, Q1 2022 Australia Economic Outlook published with KPMG showed positive momentum with eased restrictions, pent-up demand and savings accumulated over the last 2 years driving a rebound in household spending.
However, household budgets are now threatened by higher petrol prices, rising inflation and looming expectations of rising interest rates. Prices rose by 2.1% in the first 3 months of the year, taking the annual inflation rate to 5.1% - the highest level in 22 years. This makes the cost of living a key election issue. The Australian Federal budget for 2022-23 included very large fiscal stimulus and government subsidies, which should help alleviate some of the cost of living pressures weighing on consumer sentiment.
Strong economic management will be a focus for the upcoming Federal election in May 2022.