Market review

A summary of how financial markets performed during the first quarter of 2022.

It was a challenging start to the year for both equities and bonds as the war in Ukraine weighed on sentiment, while rising inflation meant bonds were out of favour. 

Global markets

It was a turbulent first quarter for financial markets. An escalation of geopolitical tensions in Europe culminated in Russia invading Ukraine, sending global equity markets sharply lower. They later recovered somewhat, on hopes that a ceasefire could be negotiated.

European markets were amongst the worst performers, with the Euro Stoxx 50 Index down 9.2%. Its market is seen to have the most to lose from the Russia-Ukraine conflict, especially with the continent’s reliance on Russia for key energy imports.

US markets also struggled, with the S&P 500 falling nearly 5% and the NASDAQ 100 falling more than 9%. A key driver of sentiment in the US was inflation, which rose to a multi-decade high during the quarter, prompting investors to position for higher interest rates. 

Invasion of Ukraine

The war in Ukraine has caused utmost devastation, and more than 4 million people are reported to have fled the country. As well as the humanitarian impact, there are other significant global implications, especially for global growth and international trade.

Western allies of Ukraine moved swiftly to place sanctions on Russia. These initially targeted the movement of money (to restrict Russia’s ability to fund its war efforts), and later moved to its key export markets, with the US and UK announcing an embargo on Russian oil, and the European Union saying it too was going to be looking elsewhere for its energy needs.

Higher interest rates as major central banks try to get ahead of inflation

Most major central banks are now raising interest rates, or have signalled an end to their pandemic-era stimulus programmes. Inflation remains at multi-decade highs in many countries and is not being helped by a surge in global energy, commodity and food prices.

In the US, the Federal Reserve (the Fed), as expected, raised interest rates in March for the first time since 2018. It lifted the cost of borrowing by a quarter per cent, from its previous near zero level.

More recent rhetoric from US central bankers has been that bigger rate hikes may be needed to get on top of inflation, and the market now anticipates up to 9 more quarter per cent interest rate hikes by the end of the year.

New Zealand market

The same drivers of global markets dominated sentiment here in New Zealand; namely inflation and interest rates. The first quarter also saw the rapid spread of the Omicron variant of COVID-19 in the community. At its peak, New Zealand was experiencing around 22,000 cases per day, but this has since fallen.

Reserve Bank raises interest rates to combat inflation

The Reserve Bank of New Zealand (RBNZ) raised interest rates during the quarter, in a bid to combat rising inflation – as consumer prices surged to an annual rate of 5.9%, for the year ending 2021.

At its meeting in February, the RBNZ signalled a more aggressive tightening path; projecting the Official Cash Rate to reach 3.35% by the end of 2024, much higher than the previous 2.6% end-point it had predicted late last year.

New Zealand equities struggle with rising interest rates

The New Zealand equity market struggled against a backdrop of falling international equity markets. While most overseas markets recovered in March, New Zealand’s market trended sideways, and this partly explains its underperformance over the quarter as a whole. New Zealand’s equity market is especially sensitive to changes in interest rates, and so investors struggled to get to grips with an interest rate hike from the RBNZ, and the prospect of more to come.

The NZX 50 lost 7.1% over the quarter, with only 14 companies in the index able to deliver positive returns. Over the quarter, companies offering higher yields, such as those in the utilities and communication services sectors, as well as those in the energy sector, were amongst the better performers. Meanwhile, growth stocks were the weakest performers, led by falls in the information technology sector, while the healthcare sector was also weak.

Economic data was generally weak during the quarter

During the quarter, economic data was generally weak across the board highlighting declining sentiment among the business sector as inflation rose to unprecedented levels, dampening the outlook for growth.

Firstly, GDP data for the fourth quarter of 2021 showed the economy expanded at a year-on-year rate of 3.1%, however, this was marginally below most forecasts. 

Headline business confidence also continued to take a hit, with the ANZ Business Outlook continuing to decline throughout the quarter, led by broad-based concerns around rising prices. Elsewhere, the ANZ-Roy Morgan NZ Consumer Confidence survey showed that confidence fell to a record low in February.

One positive was the continuation of the strong labour market. In February, data showed that the unemployment rate fell to a record low of 3.2%, from 3.4% the previous quarter.

Important information

Source: ANZ New Zealand Investments Limited (ANZ Investments), Bloomberg, Factset.

Market return indices: Global shares (MSCI All Country World Index); US shares (S&P 500 Index); Technology shares (NASDAQ 100 Index); UK shares (FTSE 100 Index); Chinese Shares (Shanghai Composite Index); New Zealand shares (NZX 50 Index); Global Bonds (JPM World Govt Bond Index); New Zealand Bonds (NZX New Zealand Government Stock Index); International listed property (FTSE EPRA Nareit Custom Developed Rental (ex-AU & NZ) Index); New Zealand listed property (NZX Property Index); Australian listed property (ASX 200 REIT Index). Returns are for the quarter, and are based on the stated market indices, shown in local currency terms and are unhedged, unless otherwise stated.

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Past performance does not indicate future performance. The actual performance realised by any given investor will depend on many things, is not guaranteed, and may be negative as well as positive.

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