The value of the Australian Dollar increased against major foreign currencies, decreasing overseas investment returns when measured in Australian dollar terms. International and Australian fixed interest markets posted mixed returns over the month.

Australia held its triennial Federal election on Saturday 21 May, encompassing elections for all (151) seats of the House of Representatives and 40 (out of 76) seats in the Senate. The results of the election led to an overturning of the incumbent Liberal/National Coalition government by the Australian Labor Party (ALP) which was able to form a majority government [1]. The leader of the ALP, Anthony Albanese, was sworn in as the Prime Minister on 23 May. 

The Ukraine-Russia war continued throughout May with Russian military forces concentrating on the Donbas region (South-East) of Ukraine. The city of Mariupol (with a population over 400,000) capitulated to Russian forces in mid-May. The final Ukrainian resistance held out in the Azovstal Iron and Steel Works facility for almost a month before they were ordered to ceasefire. The Russian army continues to make very slow progress in the Donbas region. In response, the European Union leaders committed to a sixth round of sanctions against Russia on 31 May, effectively amounting to a 90% embargo on Russian oil by the end of the year [2]. The United States Congress approved another aid package for Ukraine in May bringing the total to $54 billion since the beginning of the war.

The Reserve Bank of Australia (RBA) increased the cash rate target by 0.25%, to 0.35% on 3 May. This was the first interest rate hike by the RBA since 2010. Philip Lowe, the Governor of the RBA, stated “… it is appropriate to start the process of normalising monetary conditions … the Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time. This will require a further lift in interest rates over the period ahead” [3]. Notably the RBA did not announce an intention to commence selling the bonds it had previously bought during the pandemic. The US Federal Reserve (Fed) increased interest rates by 0.5% on 4 May. This is the second interest rate hike this cycle and the first 0.5% increase since 2000. This tightening cycle is a global phenomenon focused on curbing rising prices with the Bank of England, the Bank of India, and dozens of other central banks hiking rates in May.

Reported global COVID-19 case numbers exceeded 532 million at the end of May 2022, with cumulative global fatalities exceeding 6.3 million at the end of the month [4]. The current dominant global COVID-19 strain is the Omicron variant which has subsequently produced 7 detected sub-variants at the end of May. The rate of infection of the subvariants is extremely high and consequently, a new subvariant becomes the dominant strain every few weeks in the United States [5]. Australia has climbed to the 16th position out of all countries in terms of cumulative reported cases of infection. Notably the Chinese government is continuing its “zero-COVID-19” policy with stringent lockdowns imposed on Shanghai and hundreds of other cities, although these lockdowns are being progressively lifted.

Equities

Major foreign equity markets produced moderate returns in the month of May. Developed markets (excluding Australia) however returned -0.2% on a currency-hedged basis (and -0.8% in Australian dollar terms, reflecting the rise in the value of the Australian dollar). The best performing of the major foreign markets was the Japan’s (Nikkei 225 Index) returning 1.6%. 

The Australian stock market (S&P/ASX 200 Index) generated a return of -2.6% during May, with 10 sectors (out of 11) contributing negative returns. Real Estate and Information Technology were the worst performing sectors returning -8.9% and -8.7% respectively. The sole sector to produce a positive return was Materials, returning 0.05%.

From a foreign developed market perspective, six sectors produced positive returns. Energy was the standout performer returning 13.0% followed by Utilities and Financials returning 2.6% and 2.3% respectively. Consumer Staples and Consumer Discretionary were the lowest performing sectors returning -4.2% and -3.9% respectively.

Bonds

The Australian government bond yield curve shifted upwards in May. The upwards shift resulted in negative Australian fixed interest returns for the month of -0.9% (Bloomberg AusBond Composite Index). The slope of the Australian government bond yield curve steepened substantially in May as the two-year yield increased by 0.02% and the ten-year yield increased by 0.23%. The cash rate set by the RBA increased by 0.25%, from 0.1% to 0.35% on 3 May.

Over the month of May, major developed global government bond returns were mixed, with the Bloomberg Barclays Global Aggregate Index returning 0.3%. Notably, the European Central Banks’ two- year government bond yields increased the most of all major foreign government bonds, by 0.24%.

Currencies

The Australian Dollar appreciated against all major foreign currencies, with the exception of the Euro, in May. The Australian Dollar increased in value against the Chinese Renminbi, United States Dollar, and British Pound by 2.0%, 1.6% and 1.4% respectively, finishing the month at 0.7177 US Dollars, up 1.2 US cents over the month. 

Commodities

The price of WTI oil increased 9.5% and the price of Brent crude oil increased 12.3% over the month as the Russia/Ukraine military conflict continued to disrupt supply chains. The S&P GSCI Commodities index rose by 3.9% for the month of May, with the price of aluminium notably decreasing 9.0%. Of the precious metals, the price of gold decreased 3.1% and the price of silver decreased 5.4% in May. 

Performance of key markets over relevant time periods to 31 May 2022

Asset class	Index	Month* (% change)	FYTD* (% change)	1 year* (% change)
Australian Shares	S&P/ASX 200 Acc. Index	-2.6%	2.5%	4.8%
International Shares	MSCI World Ex Aust Unhedged A$	-0.8%	-2.0%	2.6%
International Shares	MSCI World Ex Aust Hedged A$	-0.2%	-4.8%	-2.5%
US Shares	S&P 500 Index	0.2%	-2.6%	-0.3%
UK Shares	FTSE 100 Index	1.1%	11.9%	12.4%
Japanese Shares	Nikkei 225 Index	1.6%	-3.6%	-3.6%
Australian Listed Property	S&P/ASX 200 A-REIT Index	-8.7%	-2.1%	3.3%
Australian Fixed Interest	Bloomberg AusBond Composite Index	-0.9%	-9.2%	-8.5%
Australian Cash	Bloomberg AusBond Bank Bill Index	0.0%	0.0%	0.0%
Currency	AUD/USD	1.6%	-4.3%	-7.2%

*Percentage changes in returns are for periods over the month of May (Month), the financial year 1 July 2021 to 31 May 2022 (FYTD) and for the year 31 May 2021 to 31 May 2022 (1 year). Past performance is not an indication of future performance.

[1] https://tallyroom.aec.gov.au/HouseDefault-27966.htm
[2] https://www.rba.gov.au/media-releases/2022/mr-22-12.html
[3] https://www.lemonde.fr/en/international/article/2022/05/31/eu-leaders-agree-on-partial-embargo-on-russian-oil_5985146_4.html
[4] https://www.worldometers.info/coronavirus/
[5] https://khn.org/news/article/omicron-subvariants-guide/+

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