To The Moon

The first half of 2022 was definitely one to forget for market participants. From developed market equities to emerging market equities, more specifically those in Asia, everything was a sea of red for the bulk of 1H22. Encouragingly, market started the second half of the year on a high, providing some relief to the portfolios of global investors. So how did markets perform in the month of July?

Asset class performance

Global equities in the month of July saw a better performance despite the two closely watched central banks in the world embarking on a restrictive policy path which sparked recessionary fears – the European Central Bank have raised rates by 50bps while the Feds introduced another 75bps in their quest to quell elevated price pressures. Global equities gauged by the MSCI World Index, delivered a stellar return of 7.39% while global bonds gauged by the Bloomberg Barclays Global Aggregate Index gained 1.66%.

The returns of both equities and bonds has no doubt surprised many given that the core worries of markets this year was elevated inflationary pressures spurring majority of the central banks across the globe to hike rates aggressively and thereby setting the stage for a growth slowdown. In our view, what spurred the rally in global equities was two factors: 1) the winding back of bets that the Feds would resort to a 100bps rate hike and 2) better-than-expected earnings reported – US equities makes up more than 50% of the MSCI World Index.

Shifting the focus to the fixed income universe, global bonds had their best month thus far despite persistent inflation and central banks’ policy path as fears of a recession outweighed worries of steeper policy rate hikes ahead.

Chart 1: US 10Y yields retreated after hitting the highest level since the pandemic started. Source: Bloomberg

Geographical

Western developed markets (DM) experienced a significantly stronger performance as compared to its emerging market (EM) peers – the former registered returns of 3.91% while the latter declined 0.64%. The poorer returns that came from emerging markets was thanks to the gloom surrounding Chinese equities – as gleaned from chart 2, Chinese equities have suffered a beating following a month of spectacular profits generated for investors in June.

Delving deeper, we note that US equities outperformed European equities marginally amongst developed markets. This is attributed to the resilient earnings in spite of several headwinds and speculations that the Feds will become less aggressive on their rate hike path in time to come as the world’s largest economy contracted for a second straight month – the decline in US GDP has sparked chatters that inflation might be peaking and is slated to cool.

In Asia, Chinese equities which have registered returns of more than 10% in SGD terms in June disappointed this month. Optimism appears to have faded after a lack of fresh stimulus to support a slowing economy disappointed markets. That said, the lack of support was not the only contributing factor to the sell-off. Investors of China’s property sector are getting spooked by covid lockdowns and a rapidly increasing number of disgruntled Chinese homebuyers boycotting mortgage payments on stalled projects. In essence, the worries within the Chinese property market threatens a major strain on the nation’s growth prospect as well as financial system.

Chart 2: Most equity market delivered positive returns for investors. Source: Bloomberg

Sector

All sectors traded in positive territory this month, a sign of relief for many market participants. Interestingly, the energy sector which is the poster child for the year of 2022 did not register the largest gain this month as market participants assess a slew of news – oil prices were volatile as it rose on the back of near-term capacity limits which was signaled by the two major producers, Saudi Arabia and UAE, but later declined as recession fears reignited oil demand concerns even against tight supplies. On a more positive note, the technology sector which has been shunned by investors for the bulk of the year has roared back to life, registering a gain of 13%, putting the sector in line as the second-best performing sector of the month.

Chart 3:Oil Price volatility continues as investors assess the supply demand dynamics. Source: Bloomberg

Chart 4: All sectors for once managed to avoid registering negative returns. Source: Bloomberg

Our thoughts ahead

July have proven to be a good month for investors and is something to behold. However, we would like to sound the cautious bell and warn investors not to get ahead of themselves. We expect market volatility to continue moving forward as concerns of rising rates driving the US economy into a recession has been escalating – investors will be keeping a wary eye on the Fed’s policy path and any shift in perception could stoke market volatility.

That being said, more pain could lie ahead for global markets as well. With inflation running at the fastest pace in 40 years and growth already slowing down significantly, we see a possibility that a stagflation could occur.Bolstering our opinion is the fact that higher rates will deter growth and high commodity prices will likely continue to persist due to years of underinvestment that will take an unpredictable amount of time to resolve. Should this narrative turn out true, markets will be re-pricing again which will drag down the returns of investors’ portfolios.

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