Page 7 - PSK Q2_2022_Thomas Ilinkovski
P. 7
Performance trends overall across the level of rate increases resulting in yields
REIT sector have been dominated by reaching levels not seen this century and
macroeconomic factors rather than pushing indices further into negative
underlying fundamentals. "Quality" appears territory not seen for a long time.
to be unusually cheap within the REIT Yields on 10-year treasuries, both
sector, particularly given the backdrop of domestically and globally continued their
mounting recession concerns. More volatile ride throughout the quarter. The
broadly, with REITs being one of the most 10-year Australian Treasury yield starting
domestic-focused and rate-sensitive at 2.78%, peaked mid-June at 4.2% before
sectors, the upcoming earnings season ending at 3.72%. The yield at the start of
could be a catalyst to drive an upward re- 2022 was 1.72%.
pricing of the sector with a particularly
strong rebound from high-quality REITs in The 10-year US Treasury yield began the
the "essential" sectors - residential, quarter at 2.34% also increased
technology, and industrial. significantly, peaking at 3.49% on June 14
before ending the quarter at 2.98%. The
Global listed infrastructure (unhedged) yield at the start of 2022 was 1.52%.
again provided some respite, recording a
positive return of (+1.2%). The sector Markets initially priced in at least half a
however is also succumbing, albeit slowly dozen rate rises in most developed
at this stage, to the lift in real yields and markets in 2022 with a further 2-4 in 2023
weakness in broader equity markets. to rein in inflation. This however might be
overshooting as recent key economic
Both sectors, although part of the global indicators show growth decelerating. Major
risk-off thematic, should continue, over the central banks might continue to raise rates
long-term, to provide attractive over the next few monthly meetings but
diversification benefits. Over this volatile might temper the level as further evidence
period and as we are nearing the end of of previous hikes filters through. Bond
the current cycle, both sectors again markets though are now pricing an end to
should be well-supported as global hiking cycles, with the Fed now seen
economies reopen and by infrastructure- cutting rates by half a point over the
led fiscal stimulus packages, second half of next year.
decarbonisation, the ‘green’ transition and
importantly, inflation-linked pricing models. The (Bloomberg AusBond Govn 0+Yr)
returned (-4.0%) whilst global bonds
Bonds and Cash (BBgBarc Global Aggregate TR Hedged)
Global bond markets continued to sell off returned (-4.7%). Credit markets sold off
sharply in the June quarter, with yields sharply during the quarter and continue to
markedly higher amid still elevated inflation be quite volatile. Spreads in US high yield,
data, hawkish central banks and rising in June alone, widened 165 basis points on
interest rates. Bonds rallied into quarter- top of 100 basis widening in May. At
end amid rising growth concerns and low current levels, circa 600 basis points,
consumer confidence, limiting the losses markets are pricing in a 60% probability of
slightly. global recession. Investment grade
Australian bond yields also continued to spreads also widened during the quarter
move higher in the first half of June, but not to the same extent and currently sit
reaching a peak mid-month before joining at 164 basis points. This indicates that
investors are taking precautions and
the US bond rally later in the month and
benefitting from a reassessment of the seeking the safety of treasuries and higher-
RBA cash rate outlook (evidence of grade debt whilst at the same time taking
risk off the table. Australian credit spreads
softening house prices and declining
consumer confidence) followed suit, but again. Not to the same
extremes indicating greater resilience in
As inflation reached decade peaks the domestic economy. Unlike the March
globally, central banks feverishly tried to quarter, Emerging Market debt suffered
control its acceleration, by scaling up the significant declines. EM currencies
