Market Update: Opportunity in the perfect storm
As we draw closer to the end of the year, it’s time for our last quarterly update for 2022, once again looking at the many moving parts that are influencing the investment markets.
Read on to learn more, and if you have any questions, please don’t hesitate to contact our team at NZ Britannia.
Is inflation finally slowing?
At the moment, the two big factors to watch are inflation and the outcome of the US midterm elections. Let’s start with the former.
Much like the rest of the year, inflation continues to be the number-one driver of the market. Despite the interest rate hikes delivered by central banks around the world, inflation is still running uncomfortably high – which continues to feed uncertainty and dampen market sentiment.
Investors are trying to gauge whether or not inflation will be subdued anytime soon. If not, the risk is for rising interest rates to tip the economy into a recession – a scenario that’s weighing heavily on investor sentiment.
Having said that, the latest US data seems to point to an easing in inflationary pressure. According to the latest US inflation index, the annual inflation rate in the US slowed for the fourth month to 7.7% in October, the lowest since January 2022 and below forecasts of 8%. The market responded immediately with a sharp rebound in US shares, proving once again how sensitive markets are to inflation data.
Long-term trend or just a blip? A softer-than-expected inflation rate may mean that the Fed’s efforts are starting to work, and they can afford to slow the pace of increases. But it’s certainly not the time for central banks to let their guard down.
The surprising US midterm elections
Inflation is not the only challenge occupying the minds of investors.
Contrary to many predictions, the US midterm elections didn’t turn into a ‘red wave’. Republicans were expecting a landslide victory that would give them control of both House and Senate, but that didn’t materialise. Democrats maintained their grip on the Senate, and Republicans gained a slim House majority.
Why is this important? Because US midterm elections usually have a noticeable impact on the sharemarket (at least in the short term):
- regardless of who wins, elections provide clarity, so businesses and investors know that they can plan and articulate a vision;
- depending on who wins, certain sectors of the US economy benefit differently based on the views of the party that controls most seats.
According to Nasdaq.com, the impact of these elections is likely to reverberate in the markets over the next few weeks. But what the actual impact might be is another question.
What’s happening in New Zealand?
In terms of inflation, nothing has really changed here at this point. The latest Consumer Price Index update shows that annual inflation was at +7.2% in the third quarter, and we’ll have to wait until 25 January for the Q4 data.
In the meantime, the Reserve Bank of New Zealand (RBNZ) continues to increase interest rates. On 23 November, the RBNZ lifted the official cash rate (OCR) by a record 0.75% to 4.25% - the highest level since 2008.
Most economists expected this would happen: despite five consecutive 0.5% increases, so far rate hikes haven’t slowed the economy as much as hoped. The unemployment rate is holding steady at 3.3%, and private sector hourly wages increased by a staggering 8.6% year-on-year for the September quarter – essentially outpacing inflation. It may sound like good news, but the reality is that wage rises are a major factor contributing to inflation, which can only lead to more interest rate increases.
In announcing their 0.75% OCR increase, the Reserve Bank confirmed that they’re determined to bring out the heavy artillery to slow the economy to a more sustainable level. Unfortunately, the RBNZ’s statement reads, this also means that the New Zealand economy – like many economies around the world – is expected to enter a recession in 2023.
Other risks brewing under the surface
In terms of geopolitical risks, there are global concerns around the Ukraine war and the emerging alliance among China, Russia, North Korea and Iran. But for the time being, there are still too many unknowns and what-ifs, and the markets are watching this carefully.
In other news, what’s happening in Australia is a reminder that the jury is still out on Covid. After months of relative calm, many Australian states are once again experiencing a new wave of Covid-19 and reintroducing rules and restrictions. We continue to see China sticking to is zero-Covid policy with Beijing again in lockdown. This could well exacerbate the global supply chain putting further pressure on inflation.
And then, of course, there’s Europe. Winter is coming and the energy crisis is causing concerns. Not only rising energy prices will contribute to inflation, but the low energy supply may also make it difficult to keep people’s houses warm and put industrial production on a firm footing. In the worst-case scenario, it could be an either/or situation.
The goods news: there are always opportunities ahead
With so many moving parts, it wouldn’t be too far-fetched to call it a ‘perfect storm’. But here are some key things to keep in mind:
- Despite the uncertainty, we know that the market can recover quickly and without warning, and you want to be there when that happens.
- Trying to stock-pick or time the markets is fraught with danger and something we certainly don’t recommend. Markets react quickly to news (well before most individuals can) and they’re almost impossible to time, so the only way to potentially recoup losses is to remain invested and be fully diversified.
- Whenever there’s uncertainty, there are opportunities: the markets are on sale and, when you’re investing in managed funds (including KiwiSaver), it means you may be buying more units for the same regular contribution you’re already making.
- The world has been through many calamities and despite the severity, history shows us that overall, the markets have always recovered.
- Diversification remains the best line of defence as you are spreading your risk.
As long-term investors, you’ll likely be rewarded for staying in the market and diversifying your portfolio. So once again, our bottom line is: set your goals, diversify and stay the course. We’re here to help.
Get it touch
Do you have any questions for us? Please don’t hesitate to contact us. We’re in your corner.
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.