What I saw in May 2022
The RBA increased interest rates by 25 basis points as Governor Lowe emphasised that there was a need to return to a normal monetary policy environment. In the United States, Jerome Powell of the Federal Reserve increased interest rates by 50 basis points and mentioned that further rate rises were on their way.
At time of writing, interest rates in the US are at 1.75%, with interest rate markets pricing in a further 1.25% increase by the end of September.
Energy shortage
Coal prices continued to climb aggressively over the course of the month, as energy shortages hit home across the globe. The Russian Ukraine war has accelerated these shortages, as numerous nations have implemented sanctions on the oil & gas supply from Russia. Harry Heaney covers this in more detail within the Market Insights section.
Portfolio performance
During May, both strategies suffered as markets broke to new lows and volatility continued to expand within global equity markets. The Long Short Australian Equity declined by -8.64%, while our global macro strategy declined by -7.25%.
Both strategies have experienced periods of expanded volatility as markets have whipsawed, however both strategies are still comfortably within their tested peak to trough decline analysis.
Top equity contributors for the Frame Long Short Australian Equity Fund (FLSAEF) were Whitehaven Coal Ltd (ASX: WHC), Worley Ltd (ASX: WOR) and Atlas Arteria Group (ASX: ALX). They contributed +0.30%, +0.16% and +0.12% respectively.
Largest detractors were Metcash Ltd (ASX: MTS), JB Hi-Fi Ltd (ASX: JBH) and Nufarm Ltd (ASX: NUF).
The Frame Futures Fund (FFF) declined by -7.27%. Equity, Commodity and Fixed Income investments declined by -6.26%, -0.64% and -0.58% respectively. Currency investments added +0.70%.
Readers will notice that the strategy has had reasonable contributions from all asset classes besides equities as of late, however with equity market conditions reaching extreme levels (in the short term), we expect a reversion to the mean to occur shortly.
Outlook
With the US Federal Reserve now adjusting its expectations for further interest rate increases in line with current market pricing, we anticipate that a short-term bottom (in equity markets) may be near. However, as we saw in the 1970’s, aggressive interest rate increases do not reduce inflation immediately and can take some time to work their way through the economy and reduce the demand side of the equation
If you would like to discuss any of these points, please email me at hue@framefunds.com.au or call our office on 02 8668 4877.
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