Financial Market Update – May 2022

Investment markets continued to navigate a range of challenges in May. What does this mean for you and your super? We take a look at the factors weighing on market performance and the impact to investments.

Higher inflation leads to increased cash rate

Across the world, inflation continued to increase, driven in large by the Russia-Ukraine conflict, COVID-related supply shortages and disruptions to global goods supply due to the ongoing lockdown in China. 

Central banks and the Reserve Bank of Australia (RBA) raise and lower interest rates to stimulate economic growth and combat inflation. The higher the inflation rate, the more likely it is to see hikes in interest rates.

Australia’s inflation raise is sitting at 5.1% as at 31 March 2022. This is well above the RBA’s 2-3% target range. To combat this increase, the RBA increased its cash rate from 0.10% to 0.35% in May – the first increase since November 2010. It increased the cash rate again to 0.85% on 8 June.

The market currently expects the cash rate will continue to increase to 3% by the end of the year.

Flow-on effects

Increases in the cash rate has heightened volatility across investment markets. This in turn can impact the value of financial assets, including your super.  All investment options have been impacted by the recent volatility, including the more defensive options. Here are the key drivers of performance in the market:

International equity (share) markets

International shares had a slight negative return for the month.  While the broader market was down, Energy companies generally increased in value during May.

Australian equity (share) markets

With all markets being impacted by higher-than-expected inflation data and the flow on effects from central banks increasing interest rates, the Australian share market declined in May with a fall of 2.7%. 

Fixed Interest (bond) markets

Bonds are generally considered to be more defensive than equities. However, they have detracted from performance recently as bond yields have increased. When bond yields increase, their capital value declines. This occurred because the market expects that central banks will continue to increase cash rates in response to persistent inflation.