To The Moon

Entering 2022, inflation was at the crux of the topic in the investment world which led to many speculating about the policy path that Feds will undertake to curb elevated inflation prints not witnessed in years – market participants were expecting a 50-bps rate hike by the Feds that was due in March. Amidst the prevailing environment, markets have sold off considerably as investors look to de-risk their portfolios, sparking significant volatility in return – the faster and greater the hikes come about, the greater the probability of a shock to asset prices as markets have less time to digest and adjust to the repricing of asset values.

Making matter worst was the fact that a military conflict broke out between Russia and Ukraine which resulted in a ferocious rally in commodity price, in essence placing further pressure on inflation which was sizzling hot. As the month of March draws to an end, market participants can finally take a breather from all the worries that was as the top of their minds now that the Feds have delivered a rate hike of 25bps. So how did markets perform this month?

Asset class performance

Risk off sentiments of market participants due to uncertainties surrounding the macroenvironment was the main culprit of the equity and bond market rout we witnessed in January and February. However, March was a better month for investors.

Global Equities have outperformed Global Bonds by a huge margin after falling behind the past 2 months – Global Equities gauged by the MSCI World Index delivered handsome returns of 4.45% while Global Bonds, gauged by the Bloomberg Barclays Global Aggregate Index registered a loss of 3.58%.

What drove global equities better performance in the third trading month of the year was the improving spirits of market participants as the Feds delivered the highly anticipated rate hike, eliminating worries that markets once have – a rate hike of 25bps was imposed just as expected instead of 50bps which markets were jittery about.

On the fixed income front, US 10Y yields continue to march higher as the Feds indicated that they would consider more aggressive rate hikes if necessary, leading to a selloff in 2Y and 10Y bonds in the fixed income universe. The selloff was concentrated in Treasuries that are short dated which reflects anxiety that the course of monetary policy is going to be even more drastic than has been contemplated.

Chart 1: US 10Y Treasury Yields sits at the 2% range. Source: Bloomberg

Geographical

Developed Markets (DMs) outperformed Emerging Market (EMs) at a geographical level – the former registered a positive return of 4.12% while the latter incurred a loss of 4.12%. The poorer performance of EMs comes during a period where Chinese equities took a beating despite rallying more than 30% in 2 days when the Chinese government’s pledge to support the battered real estate market, ease the crackdown on technology firms and stimulate the economy, as risk of Chinese equities being delisted from US exchanges and a greater likelihood of a bigger slowdown in the growth of the Chinese economy outweighs the positives.

In the Western developed world, US equities had a tumultuous trading month whereby equities were initially sold off as inflation hit a fresh high and investors grew increasingly worried about the impact of Russia-Ukraine conflict on global growth but later rallied as market participants comes to grips with the Central Bank rate hike decision, strong jobless claims fata and further progress of peace talks between Russia and Ukraine. European equities on the other hand rebounded as well.

Chart 2: A quick turnaround for some markets. Source: Bloomberg

Energy sector remains the best performing sector

All sectors managed to eke out gains for investors with the exception of consumer staples. That being said, the energy sector is still the top performing sector year to date, building on its strong performance it enjoys the last 2 months – the sector returned investors a whopping 21.75% in March. The stellar performance of the energy sector does not come as a surprise given that energy prices continue its upward trajectory which augurs well for companies in the sector – oil prices have had a volatile trading month as market participants react to a slew of news developments (the US and UK will release supplies from its oil reserves and the output from the OPEC+ alliance will remain unchanged) and natural gas prices are at all-time highs.

Chart 3: Energy sector is the standout performer. Source: Bloomberg

Chart 4: Oil prices remains above $100/barrel despite a tussle between the bulls and bears. Source: Bloomberg

Our thoughts ahead

Looking ahead, we believe that market participants will continue to watch the policy path of the Feds closely as the yield curves flattens, stirring a debate as to whether the bond market is flagging out a steep economic slowdown or even a recession ahead. With this concern in mind, investors should brace more volatility and, in our view, adopting the strategy of dollar cost averaging to navigate through the prevailing market terrain will be wise as the case for long term investing remains intact.

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