Investment Portfolio Update – March 2022 Quarter

The March quarter in investment markets

The March quarter brought one of the worse performing quarters in many years, particularly in overseas equity markets, but also in the global bond market, which saw its worse result in over three decades.

The Australian share market was relatively protected over the quarter, predominantly due to the ongoing increase in commodity prices.

The negative returns over the quarter were influenced by several events that forced investors to reflect on the need for moving to a more defensive positioning in portfolios.

Analysts are now revising the probability of a recession in the US in 2023, which has increased over the quarter to sit at around the 30% level.  Investors will need to review this in relation to asset allocation and global equity market exposure.

The March quarter brought to the fore concerns over the pace of global interest rate hikes, with the US FED commencing the first of what is likely to be many raises in the FED cash rate over 2022. The likelihood of the FED’s first 0.50% increase in the US cash rate next month grew substantially.

In New Zealand, the central bank made a 0.50% increase in its overnight cash rate this week, which was the largest upward movement in the country’s cash rate for 22 years.

Clearly, the days of access to cheap credit is coming to an end.

Rising inflation also weighed on bond yields over the quarter, with increases in yields on both government and corporate bonds. These movements also produced negative returns over the quarter from fixed interest investments, as the higher bond yields resulted in falling prices for bonds.

The yield on the US ten-year treasury bond rose over the quarter from 1.5% to 2.3%. In the UK, the ten-year bond yield moved from 0.97% to 1.61% and in Australia the government ten-year bond rate moved from 1.3% to be now at 3%. This is a significant move over a short period of time. 

Global Share Markets – March Quarter Performance

Global Share markets
 
March 2022 Quarter
Financial Year to Date
Australia
ASX 200
+1.1%
+2.9%
US
Dow Jones
-4.6%
+0.5%
 
S&P 500
-5.0%
+5.4%
 
Nasdaq
-9.1%
-2.0%
United Kingdom
FTSE
+1.8%
+6.8%
Japan
Nikkei
-3.4%
-3.4%
China
Shanghai Composite
-10.7%
-9.4%

Analysts are now revising the probability of a recession in the US in 2023, which has increased over the quarter to sit at around the 30% level.  Investors will need to review this in relation to asset allocation and global equity market exposure.

Many central banks have also flagged their commencement of quantitative tightening, which is the reverse of quantitative easing. Quantitative easing (QE) was adopted during the GFC and was more widely adopted globally during the COVID pandemic. QE is where central banks turn on the printing presses and vacuum up bonds onto their balance sheet, releasing newly printed bank notes into the economy. The objective is to flood the financial system with cash and hence lower interest rates.

Quantitative tightening (QT) is the opposite, so instead of switching on the printing presses, the central banks fire up their furnaces. This means that when bonds the central banks own reach their maturity, the central banks receive the cash from the bond issuer and simply start shovelling the cash into their newly started furnaces. This has the effect of removing substantial liquidity from the economy and putting upward pressure on interest rates.

A lot of cash has been injected into the system over the last couple of years, so the impact of its removal on interest rates is yet to play out. However, the US and Australian central banks have flagged the commencement of quantitative tightening over 2022.

Kauri Wealth Investment Portfolio – Performance

Kauri Wealth – Model Portfolio
March 2022 Quarter
Financial Year to Date
Portfolio Performance
-1.7%
+4.8%
Defence Allocation
-2.7%
-2.3%
Growth Allocation
+1.2%
+8.1
   • Australian Property
-1.7%
+6.8%
   • Australian Shares
+4.8%
+20.9%
   • International Shares
-9.0%
-6.0%

The portfolio has been negatively impacted by the carnage in the bond markets over the quarter, as well as poor performance from international equities, (particularly emerging markets), where the ongoing negative returns in Chinese equity markets has impacted earnings.

The Australian equities exposure continues to outperform all other asset classes, including the benchmark Australian equities index, the ASX200 index, which has returned +2.9% so far for the 2022 financial year, in contrast to the Kauri Wealth portfolio, which has returned +20.9%.

Kauri Wealth Model Portfolio – Investments – March Quarter

Model Portfolio Investments
March 2022 Quarter
Santos Ltd
+25.4%
Incitec Pivot Ltd
+17.0%
Westpac Banking Corp
+13.5%
National Australia Bank
+12.2%
Lendlease Group
+8.6%
Cleanaway Waste Management
+8.1%
carsales.com
-15.2%

Kauri Wealth Model Portfolio – Investments – Financial Year to Date

Model Portfolio Investments
March 2022 Quarter
GrainCorp Ltd
+80.3%
Incitec Pivot Ltd
+68.6%
Alumina Ltd
+30.7%
National Australia Bank
+28.3%
Santos Ltd
+17.1%
Rural Funds Group
+12.3%
Betashares Aust Invest Grade Corp Bond Fund
-11.6%

Kauri Wealth Investment Portfolio – Company News

Santos Ltd +25.4%

In February, Santos announced its full year results with a record free cash flow (the cash left over after a company pays for its operating expenses and capital expenditures)  and earnings, as well as a 70% increase in its final dividend.
 
The company reported record free cash flow of A$2.1 billion (US$1.5 billion) and an underlying profit of A$1.323 billion (US$946 million).

Santos also completed its merger with Oil Search to create a global company with a market capitalisation of over $25 billion. The merger delivers increased scale as well as growth opportunities over the next decade.

Incitec Pivot Ltd +17.0%

Fertiliser prices remain at historically elevated levels, due to supply implications from Russia’s invasion of Ukraine. Russia is the world’s largest exporter of fertilisers, accounting for around 23% of ammonia exports, 14% of urea exports, 10% of processed phosphate exports, and 21% of potash exports. Incitec Pivot produces variants of the first three.

The company also announced it has invested in a joint venture to develop a new technology to use waste, carbon and mineral fertilisers to create novel and innovative bio-fertilisers. It has also entered into a partnership with Fortescue Future Industries on a green ammonia growth opportunity.

Betashares Australian Investment Grade Corporate Bond Fund -8.5%

The recent movements in long-term bond rates have been sharp, with the Australian government’s ten-year bond rate moving up from 1.3% at the end of 2021 to 3% today.
These movements in bond rates have also flowed through to high-quality corporate bonds, producing negative returns over the quarter, but now providing yields of around 4.5%.

Due to the correction in the bond market over the quarter, bonds issued by A-rated Australian corporates paying yields of above 4% look very attractive.

Kauri Wealth Management is a Fee for Service investment advisory business and as such my advice is built around ongoing personal relationships with my client base. Personalised independent advice is backed up by a breadth of industry knowledge.

I accept a limited number of new clients each year and would be happy to discuss this further with you. Please don’t hesitate to contact me.

Russell Lees
Senior Adviser
Phone: +61 439 852 963
Email: russell@kauriwealth.com.au

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