By Peter Little
Johannesburg, 4 July 2022 - June was the worst month of an already tough year for global equity markets (the MSCI World Index is down 8.6% month-on-month) as developed market equities fell far enough to push them into a bear market (officially a drop of over 20% from their previous peak (the MSCI World Index is down 20.3% year-to-date) and giving them the worst first-half performance since 1970. In 1970, markets bounced back in the second half of the year, but more recent episodes of double-digit negative returns in the first half of the year (2001 and 2008) have been followed by more pain in the second half, though in both instances those periods coincided with US recessions.
The catalyst for investor pessimism in June was the release of US May inflation data (8.6% year-on-year), which came in not only higher than expectations of 8.3%, but also above the previous peak of this latest inflationary bout in March (8.5% YoY) in an ominous sign that we are not yet “past the peak” inflation in the US.
Days later the US Federal Reserve (Fed) announced a 0.75% rate hike (the largest increment since 1994). Bond yields spiked as investors scrambled to price in a more aggressive path of monetary policy tightening for global central banks, with US 10-year government bond yields reaching 3.5% intra-month, the highest level since 2011 when US politicians haggling over the budget caused a government shutdown and rating agencies downgraded the US sovereign credit rating. US 10-year bond yields fell into month-end, settling at 3.0% (0.2% ahead of their May close), but that was enough to push the Bloomberg Global Bond Index down 3.2% for the month, leaving it 14% lower for the first half of 2022, more than twice the previous worst first half of the year in 1999 (-6%). The prospect of the Fed leading the way in monetary policy tightening and general risk aversion was a tailwind for the US dollar, which rallied against most currencies (euro -2.3%, British pound -3.4%, Japanese yen -5.2%, and Brazilian real -9.9%, all down month-on-month against the US dollar).
In developed market, tech shares were still among the biggest losers, with the tech-heavy Nasdaq 100 Index down 9% MoM and down 29% for the year, while the S&P 500 energy sector (the only sector in positive territory this year), was comfortably the worst-performing sector in June (-17% MoM) as oil fell by 6.5%. With oil supply still constrained by the conflict in Ukraine, the drop in the oil price was at least partially a function of investors factoring in the prospect of tightening monetary policy causing a recession that would dampen demand. The increasing possibility of a recession weighed on other commodity prices as well (Bloomberg Industrial Metals Index -16% MoM and the Bloomberg Agricultural Commodity Index -9% MoM).
The drop in commodity prices weighed on the Brazilian stock market, this year’s best-performing global market, which fell 11.5% MoM. Despite the poor month for Brazilian equities, emerging market equities outperformed developed market equities for the third consecutive month, though emerging markets still had their worst month of the year (the MSCI EM Index down 6.6% MoM and down 17.6% year-to-date). The EM outperformance was predominantly thanks to a strong performance by Chinese shares (Shanghai Composite Index 7.5% MoM) as the country began to emerge from its harsh Covid lockdowns and, in a sign that regulations were possibly shifting to a tailwind for China’s tech sector, Alibaba rose 18% on news that the IPO of its financial services division, Ant Group, was being reconsidered. This is almost two years after the world’s biggest listing was blocked by regulators in the wake of disparaging comments made about the Chinese political elite by Alibaba founder, Jack Ma.
Peter Little is a fund manager at Anchor Capital