Market Update: Inflation Cloud Still Hovering

It has been another interesting quarter in the markets, with many moving parts, persisting uncertainty and volatility, but also numerous opportunities for investors to seize.  

In this quarterly update, we will give you a snapshot of key factors and trends to watch out for, as always with our team at NZBritannia in your corner.

All eyes are on inflation and interest rates

Inflation and interest rates continue to capture the attention of the market, with central banks around the world, including our Reserve Bank (RBNZ), firmly focused on bringing inflation back to a more sustainable level.

As expected, the RBNZ once again increased the official cash rate (OCR) this month, from 2.5 per cent to 3 per cent – the fourth 0.5 per cent increase in a row. But this time, mortgage rates moved up only slightly, possibly because most of the latest OCR hike had already been factored into the lending market.

The key question remains: what lies ahead for inflation and interest rates? We will likely see more aggressive rate increases in the coming months, with economists forecasting the OCR to peak at around 4 per cent by mid-2023.

In saying that, a lot is happening on different fronts, which makes forecasting with high confidence practically impossible. The general sentiment seems to be that inflation is not yet under control, but things are moving in the right direction. Much will depend on labour market trends, as talent shortages remain a persisting global issue across most industries, pushing wages up and therefore further boosting inflation.

According to Stats NZ, salaries and wages increased 8.8 per cent in the year to the June 2022 quarter – the biggest annual rise since the Stats NZ series started in 1998. And while the unemployment rate was slightly up (from 3.2 to 3.3 per cent) in the same quarter, it's too early to tell if labour resources are becoming more available.

Clean energy investments getting a boost

The other big news in the quarter is the Inflation Reduction Act 2022 passed by the US Congress this month, which includes the biggest investment in US history to fight climate change. The bill aims to reduce US emissions by 40 percent by 2030 through Government subsidies, tax credits, and grants for consumers and clean-energy manufacturers. $369 billion is set to be invested in climate and clean-energy programmes within the next 10 years.

The US Government's move confirms that a transition to cleaner energy sources is underway, albeit probably not as fast as some people would like.

With awareness of global warming on the rise, more and more investors are coming to realise that we need to be investing more responsibly and, so to speak, 'do the right thing'. Of course, the shift cannot happen overnight, and the concept of sustainable investment is a lot more nuanced than just avoiding certain industries altogether. After all, what constitutes ESG (Environmental, Social and Governance factors) is often very subjective.

But we're moving towards a more mature approach to it – and that is also the approach we're adopting here at NZBritannia. We want our portfolio managers to be focusing on companies that are aware of their environmental or social impact, are doing things to mitigate it, and looking at new ways and initiatives to make a difference. Get in touch if you'd like to learn more.

Uncertainty from China and Russia

While inflation is the focus, there are also geopolitical risks to the economic outlook. China has been flexing its muscles over Taiwan while at the same time grappling with a troubled local economy, exacerbated by a zero-Covid policy. Chinese representatives have made it clear that their position on unifying Taiwan to the mainland is not negotiable, and at some point, this stance may create issues for the Pacific and the rest of the world.

The Russia-Ukraine war is another side of the equation. Sadly, the conflict is no longer front-page news, but concerns remain that Russia may at some point interrupt oil and gas supply to Europe, which would disrupt European production. The jury is still out on whether they will do that, especially considering that stopping gas and oil supply would also hurt the Russian economy.

What about the cryptocurrency market?

The recent cryptocurrency crash (or 'crypto winter', as it is known to many) further cemented our view that crypto assets are not aligned with our long-term approach to investing. We currently hold zero in the portfolio, and we will continue to hold zero.

A lot of people have been attracted to it by the prospect of quick returns. And while some have earned significantly, many more have lost large amounts of money due to staggering volatility. It's just not suitable for what we do here at NZBritannia – which is helping clients achieve meaningful long-term returns with a manageable amount of risk.

With uncertainty comes opportunity

There's no denying that the sharemarket has been in 'bear mode' for a while now. A bear market is generally defined as a market that has fallen by 20% or more over a period of two months or more. While this can be scary, when it comes to long-term investing, it's always important to put things into perspective.

Bear markets have come (and gone) in all shapes and sizes. Excluding this year, there have been 12 such downturns in the US market since 1946, and each of them was different from the next. A study by Ben Carlson shows that these bear markets on average took 21 months to break even, i.e. go from peak to trough back to peak. It could be a lot less or a lot more, but inevitably, bear markets do recover: we just don't know when.

That's why no one can tell you when the bottom of the market will be. What we can tell you, though, based on historical data, is that long-term investors are always rewarded for staying in the market. Investing for the long term, as opposed to speculating for short-term gains, is a combination of diversification and patience. Set your goals, diversify your strategy, hold the line – we are here to help you stay on track.

Get in touch

Do you have any questions for us? Please don't hesitate to contact us. We're in your corner.

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The information contained in this publication is intended for general guidance and information only. It has not been personally prepared for you. Therefore, you should not act on this information if you have not considered the appropriateness of this information to your personal objectives, financial situation and needs. You should consult with us before making any investment decision. Historical market performance may not be indicative of future market performance.