Key Points:
- In our latest Cross-asset review, we note the materially positive moves in Commodities, AUD and to some extend the Australian equity market; reflecting war-related supply shocks in the commodity market.
- On the other hand, Gold price and VIX (US and Australia) rose to reflect rising risk aversion amongst investors. Both geopolitical factors and rising inflationary pressures are the two big concerns on investors mind.
- The re-pricing of inflationary expectations saw significant capital losses in the bond market. Both Australian government and global government bonds have lost more than 5% of value in the past 3 months.
- Risky asset such as equities were not spared. The rising cost of capital (bond yields) and uncertainty imposed by geopolitical factors caused notable sell-off in the equity markets around the world.
- Frontier Markets and Emerging markets were the worst performers, delivering close to -10% returns in the March quarter. Global equities (DM) lost 8.4% while S&P500 gave back 7.5% over the same period. These performance numbers are unhedged so at least half of the negative returns are currency related (AUD appreciated 4.1% in TWI terms).
- Overall, it was a tough quarter for a 70/30 type diversified portfolio as both equities and bonds delivered negative returns. It was an even tougher environment for more conservative 30/70 funds due to heavy losses in the bond market
- We expect volatility to remain high on the back of elevated concerns regarding inflation and ongoing geopolitical issues.
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