Volatility in share prices is not new. Nor is the view that “this time it’s different”. In a world of pandemics, wars, inflation and elections, I’d be surprised if there wasn’t market reaction.
Uncertainty is the sharemarket’s enemy, and my article from last quarter about the volatility created by the Russia/Ukraine conflict still rings true.
Investment markets are cyclical. At any point in time, markets are either too expensive or too cheap. Right now, it is clear the risk is to the down-side. Relentless selling is pulling prices down, and it seems all types of investments are going along for the ride. Previous year’s market darlings such as thematic ETFs, US tech companies and supposedly stable fixed interest investments such as bonds are being sold down. Most portfolios have some exposure to these types of investments, and we are starting to see negative investment returns in some instances for the last 12 months.
The difference between last quarter and now is that the speculation surrounding central banks raising interest rates has now ended. It is actually happening! The monetary policy tightening process has started in most major economies, and the messaging from these banks has changed. Multiple rate rises over the next 12 months are now seen as likely. It is often said that it takes 18 months for the impact of an interest rate rise to flow through to the economy, however I think the impact will be far quicker. No-one thinks there will only be one increase. Most households are tightening budgets for tougher times ahead. While the recent 0.25% increase may have minimal impact, most are aware there are many more rises to come.
Analysts and economists who know far more than me are worried that the rate rises are too little, too late. The time to start raising rates was some time ago. The inflation genie is out of the bottle, they say, and the rapid attempts to reign it in increases the risk of recession in many global economies. Whether or not this is true will drive investment market uncertainty for some time yet.
For the investor, rising rates can provide a small bonus. For those more defensive investors, interest/income returns on many investments will increase slightly. We have already noticed a decent rise in interest available on longer-term term deposits. Holders of floating rate, ASX-listed hybrid capital notes and similar will notice greater income returns. Unfortunately, fixed-rate bond holders (not many of our clients, they can be very hard to access) will have noticed falls in the values of these assets as investors look elsewhere for improved fixed interest returns.
Many investors will not have lived or been invested through high inflationary periods. It is, of course, part of normal market cycles. Diversified portfolios of high quality investments across all asset classes should, as they always do, weather the storm ahead.
As always, if you want to discuss your investments or the opportunities that may exist, please contact our advisers today.
