While Russia’s invasion of Ukraine undoubtedly creates some market volatility and opportunities, this time it feels somewhat different.
“Sharemarket Weakness Provides Opportunity” is a recurring theme in many of my quarterly articles. Market weakness associated with coronavirus, Chinese trade issues and inflation have all been topics of discussion in the last couple of years, and I’ve gone to lengths to explain the opportunities these events create. You could be mistaken in thinking that I run the same article each quarter, simply updating the reason for the weakness, updating the chart, and using the same “opportunity” mantra. This would be simple and quick. The publisher of our quarterly e-newsletter can assure you, that based on me constantly missing article deadlines, there is nothing about these articles that are simple and quick!
This time it’s different though. This is not to say that investment opportunities have not been created by Russia’s invasion into Ukraine. It simply doesn’t feel right to me to be actively promoting them, given the significant loss of life, trauma and upheaval that is occurring. I’m more comfortable waiting to see how this plays out for a little longer before pinning the ears back and going all in. Still, I am an investment adviser, and I have a job to do…
Firstly a recap of the last quarter. A 10% correction to the Australian sharemarket (ASX200) in January undid a lot of the good performance achieved throughout the last 12 months. This correction, mirrored around the world, was through fear that years and years of lower interest rates were about to come to an end. Increasing interest rates is a tool used to counter increasing inflation, the cost of living. Supply chains are grinding to a halt and economies are re-opening, leading to price rises across the board. Increasing prices are inflation. To take some heat out of the demand which causes prices to fall, the RBA contemplate raising interest rates. It is a matter of when, not if, rates will rise!
Rising rates will impact those with debt. Those with mortgages will have to devote more of their income to paying down that debt if rates are higher. On the other side, many long suffering self-funded retirees will celebrate rising rates, as this should flow through to higher returns on their savings and term deposits.
The above interest rate/inflation link is about all I learnt in Year 12 Economics. I did pass, but only just. But it is only now that I work in the industry I do that I can start to see the theory at work, with real-life practical examples.
Proving again that market weakness can often be seen as an opportunity, in late January/early February, the recovery in sharemarkets was swift. It seems that as soon as issues that cause uncertainty (in this case, inflation and looming rate rises) are understood and accepted, the market reverts back to trend and continues onwards and upwards. Russia’s invasion has resulted in a fall in recent days.
Where the market goes from here is difficult to assess. There are simply too many unknowns currently. The one thing I do know is that sentiment drives the short term fluctuations in sharemarkets. Fear has returned, and this is playing out with some recent selling pressure. I also know that when I walk through my local supermarket or line up at my bank, I notice there is the same amount of people conducting the same business as they were two weeks ago. Miners in the West are probably working just as hard as they were two weeks ago. This is simplistic, but Australian businesses, regardless of the outcome in Ukraine, remain healthy. This has been confirmed by ASX “Reporting Season”, which has been taking place in recent weeks. Whether this is an opportunity or not, there is always a case for making regular, long term investments.
If you have an existing investment portfolio or super fund, or if you are looking at starting out for the first time, get in touch with our advisers today. We can help you understand how these world events impact you, and if they create an opportunity.
