To The Moon

Persistently high inflation has given central banks the impetus to tighten monetary policy with March seeing the first-rate hike of 25bps delivered by the Feds since 2018. As a result, more hikes are expected to come this year as elevated price pressures continue to ripple through global economies, threatening to increase the cost of living – the next hike is due in May and markets are pricing in a 50bps rate hike as many believe that the Feds are now behind the curve.

Amidst all the speculation of an aggressive rate hike in the month of May, markets have sold off considerably as investors look to de-risk their portfolios, in turn sparking volatility – 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 re-pricing of asset values. So how did markets perform in the month of April?

Asset class performance

Market sentiments continue to be shaped by a hawkish Fed, commodity market disruptions caused by the war in Ukraine, and the prospect of an economic slowdown. As such, both equities and bonds have experienced a horrible month of trading, albeit equities outperforming marginally – Global Equities gauged by the MSCI World Index incurred a loss of 4.2% while Global Bonds, gauged by the Bloomberg Barclays Global Aggregate Index, shed 4.92%.

Global equities have slipped into negative territory once again after delivering some good returns the month prior thanks to the panoply of risk which spans from the pandemic, supply chain snarls, and monetary policy tightening souring sentiments of market participants. However, the most imminent cause of the weak performance was global Central Banks’ turning a tad more hawkish than they already are – fears of steeper rate hikes kept equities grounded as market participants evaluate the risk of an economic slowdown, more specifically in the US.

On the fixed-income front, the global bond rout deepens. Hopes that the Treasury rout has priced in the worst-case scenario for inflation and rate hikes appear to be illusory at the current juncture – yields on the US policy sensitive 2-year note make it way higher, reflecting the anxiety that the course of monetary policy is going to be even more drastic than has been contemplated.

Chart 1: US 10Y Treasury yields breached levels last seen before the pandemic. Source: Bloomberg

Geographical

Developed Markets (DMs) at a geographical level performed better than Emerging Market (EMs) – the former delivered negative returns of 4.33% in SGD terms while the latter returned investors -5.82%. The weaker performance of EMs comes during a period where price pressure is now gathering momentum across economies in Asia, bringing the continent that was once relatively unaffected by elevated price pressure more aligned with the rest of the world, resulting in an increasing number of central banks in Asia to consider more aggressive monetary policies stance, in essence triggering a selloff in Asian equities. Additionally, China’s renewed yet broadening lockdown from a recent virus outbreak has also added to the woes of investors on top of the yearlong regulatory crackdown introduced by regulators.

Delving deeper, we note that amongst DMs, European equities weathered the global market rout better than the US which we believe is due to its cyclical tilt – the S&P500 Index holds a heavier weighting towards the technology sector which is bearing the brunt of the selloff as long-duration assets are naturally more sensitive to changes in rates.

Chart 2: All markets traded in negative territory in the month of April. Source: Bloomberg

Energy sector rally cools while the Technology sector struggles

The energy sector rally takes a breather after three months of spectacular returns but remains the top-performing sector on a year-to-date basis. Blistering oil prices have begun to pull back in the month of April as market participants weigh the impacts of China’s measures to contain the virus and moves by the European Union to cut its reliance on fuel from Russia – the lockdown in China has led to a sharp contraction in economic activity, translating to a decline in demand and oil stockpiles swelling in the world’s top importer of the fuel.

Chart 3: The oil prices had a wild trading month. Source: Bloomberg

On the other hand, the technology sector suffers another month of beating despite fundamental strength revealed from the first-quarter earnings, albeit with stock-specific discrepancies thanks to a potentially more aggressive rate hike in the coming months threatening valuations that became stretched after two years of strong returns.

Chart 4: Despite a pullback, the energy sector still outperforms its peers this year. Source: Bloomberg

Our thoughts ahead

Going ahead, we continue to hold the view that volatility will remain the watchword in markets, stoked by China’s struggles to suppress the covid outbreak, the ramifications of the war in Ukraine and worries that Fed tightening may tip the world’s largest economy into a recession. Regardless, the case for long-term investing is still intact as pockets of opportunities are evident. Click on the article links down below to learn more about investment opportunities in the current market.

Read: Is it perhaps time to invest in commodities?

Read: Why now might be the time to invest in the financial sector

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