Global equities strengthen
Glenmore Asset Management
After a very challenging finish to FY22, July was a strong month for equities globally. In the US, the S&P 500 rose +9.1%, the Nasdaq was up +12.4%, whilst in the UK, the FTSE was more muted, rising +3.5%. Domestically, the ASX All Ordinaries Accumulation Index rose +6.3%.
The top performing sectors on the ASX were technology (assisted by falling bond yields), whilst resources were the worst performer, driven by weaker commodity prices. Unsurprisingly, small caps outperformed large caps as investor risk appetite materially improved.
In our view the key driver of the rally in July was investor expectations around inflation (and hence interest rate hikes) beginning to moderate as commodity prices eased, and with central banks now well underway with raising rates, investors potentially can see some light at the end of the tunnel with regards to the current restrictive monetary policy.
During the month, the Federal Reserve (US central bank) increased the Fed Funds Rate by 75 basis points (bp) to a range of 2.25% - 2.50%, whilst the RBA increased the cash rate by 50bp to 1.35%. Whilst these are quite material increases, they were largely expected by investors, with consensus that there will be more such hikes over the course of 2022.
Commodity prices were broadly weaker in July, driven by fears around an economic slowdown, particularly in China. Iron ore, crude oil and copper all fell -4%, whilst gold declined -2%. Thermal coal outperformed, rising +6%.
In the bond market, notably the key US 10 year bond yield fell -36 basis points (bp) to close at 2.70%, whilst the Australian 10 year bond yield fell 60 bp to close at 3.1%. The movements of both in July were a function of some early signs that inflationary pressures have started to ease.
Some key themes we will be monitoring are cost pressures and how companies are dealing with them, as well as any impact on demand and/or revenue from recent central bank interest rate increases. As has been the case in the previous years, we are optimistic that reporting season can provide some excellent new investment ideas.
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