YO U R I NVE STI N G
The Good Fight Against Inflation Optimism for 2022 went out the window with Omicron and the Ukraine War, says Greg Smith of Devon Funds. But if we can get inflation under control there could be positives ahead for investors.
There were many reasons for investors to be optimistic as we headed into 2022.
The main fallout from the invasion was a parabolic surge in commodity prices.
We had waved farewell to the Covid-19 alert system and moved to a more fluid traffic light protection framework.
Prices for oil, gas, wheat, corn and nickel, among others, took off on supply concerns. Many of these have since settled back to some degree, but remain higher than before.
The borders were still closed, but life felt like it was starting to normalise, which gave many businesses greater certainty. The economy was doing well, unemployment was very low and housing prices were still rising.
This added to already high prices being experienced by a world coming out of the pandemic, confounding central bank officials’ attempts to fight against inflation.
The markets had also ‘adjusted’ to the Reserve Bank moving early relative to the rest of the world on rate rises, to head off inflation.
Rate hike expectations ratcheted higher – the yield on the US 10-year Treasury bond has since gone above 3 per cent for the first time since 2018.
The rest of the world was also opening up, which was good news for many corporations.
Keep an eye on inflation Inflation and its implications for interest rates look set to remain highly relevant to investors through the June quarter.
Shares that were Covid ‘beneficiaries’ were meanwhile still doing well, and the New Zealand stock market had finished the year with a spring in its step. A contagious new twist But, as we know now, the first quarter of 2022 bought some significant developments. The arrival of the highly contagious Omicron variant provided a new twist to the pandemic. We coped, but the markets were also starting to fret over the prospect of higher interest rates as the world’s central banks sought to combat multi-decade highs in inflation. And then, on 24 February, there was a new threat from a not-so-invisible aggressor. Russia invaded the Ukraine. There was a corporate backlash but, from the market’s perspective, the direct impact to New Zealand was minimal, possibly because Russia ranked only 25th in terms of trading partners. WI NTE R 2 0 2 2 | I N F O R M E D I NVESTO R 1 1 6
New Zealand’s largest customer, and developments around its covid-zero stance.
No-one knows how the war will play out, but commodity prices appear to have calmed following an initial stratospheric surge.
Also of interest will be any stimulus plans to maintain economic growth there, because President Xi faces re-election later this year.
At the same time, there’s some evidence – but not conclusive – that supply chain blockages are starting to ease in the midst of the global reopening.
We’ll be closely watching New Zealand’s economy as the first quarter’s gross domestic product (GDP) numbers are due mid-June.
Developments here will be closely watched across the corporate sector. Any signs that inflation has peaked will be well received, dampening the prospect of super-sized rate hikes in the coming months.
Investors are ideally looking for a ‘Goldilocks’ scenario where the economy is cooling, but not too fast.
Some people worry about the prospect of a recession, but many economies are in good shape. This includes the US economy, which is still growing, and where unemployment is at 50-year lows. The strength of the world’s largest economy was also evident in the March quarter earnings season. The China question Investors will be watching China,
The New Zealand property market has softened substantially this year as homeowners faced up to the realities of higher mortgage rates. Property prices are, however, still some way above pre-pandemic levels. Also encouraging is that unemployment is at the lowest level since the 80s. Pressure on the border The borders will remain in sharp focus. Tourism operators got a lift from the removal of restrictions for New Zealanders,
