Indeed, we are all learning Greek! But we must sympathise with the Greeks who are having their alphabet letters picked off one by one. As s a new variant of Covid-19 emerges, it is given a new Greek name by way of its alphabet. We are now up to Omicron, as we know.

Although the media is having its usual field day with being able to keep the headlines going for near two years now (yep, two years!) rattling on about the Covid-19 ‘crisis’ as the daily headline news. Variants have always been expected but, so too is the increasing percentage of vaccination rates happening around the globe. The remaining challenge is still to properly tackle the issue of getting vaccinations into the populations in the undeveloped world. If travel and border openings continue to increase, as they have in the past couple of months, then this means greater vaccination must happen in those particular, more vulnerable countries. Covid-19 does not recognise country borders!

With more time and research, you would believe that future variants will be swiftly tackled and mitigated more quickly. Positive developments and actions combating the virus have come a long way in the past six or so months. The virus, even with its variants, should become less virulent in impacting our lives and economies. I think this is in common agreement now.

Certain economic factors affecting the major global economies seem to be playing out pretty much as outlined in our recent newsletters. These factors include seeing the continued economic growth and progressive activity; consumer and business demand exceeding supply availability; cash galore to be spent (primarily because of the excessive cash holdings from cash savings built up in lockdowns); rising global inflation, and pressure on global interest rates to rise in the nearer future.

 As the global Covid-19 lockdowns and restrictions have, or are, being ‘unwound’, the world economies are responding positively. Economic fundamentals are also improving. As world supply chains do open up, the labour market flows do improve, and with cash and liquidity abound, it certainly appears that economic momentum is gaining its continued strength, which is certainly not surprising. Australia is about to see a much-needed influx of overseas workers’ and students’ imminently. The shortages of goods, materials and workers’ still remain but these ‘bottlenecks’ should be eased somewhat over next year as the global engine of activity increases and supply chains resume more to normality.

The underlying economic impetus is gaining faster traction, which augurs well for 2022. Yet, this is predictably what is causing the market volatility of late, as we observe that central banks’ are, or will be, reducing Quantitative Easing programs (which were very necessary to be implemented for stabilisation purposes, during the first few months’ of the Covid-19 pandemic last year). In addition, these central banks are having more ‘hawkish’ talk about the need to raise official interest rates sooner (possibly in 2022 rather than later). This is particularly the case in the US, the world’s largest economy. The Eurozone is closely following this trend too. We are also seeing incredibly strong US$ gains on rate hike expectations. The US Fed’s meeting this month will be an important one for the markets and rate outlooks.

All this is not a surprise. The slashing of interest rates and the voluminous QE measures made from early 2020 and during the ensuing months’, were done so to avert what could have been an economic calamity from the initial panic and uncertainty caused by the swift impact of the Covid-19 pandemic in March last year. (Of course, as true investors, we understand that reacting negatively to panic is not a good long term investment strategy!).  Now, with the world coming out of this pandemic mode, we should reasonably expect the ‘return to more the norm’, and therefore to see less government QE and to have more standard i.e. have higher interest rates at normalised levels. Near zero cash and bond rates are not normal. The level of dependency on these measures is not needed ahead. I believe we are seeing this adjustment period underway, hence this intermittent volatility.

Again, rising interest rates are not good for those investors with traditional bond holdings. As for those with people with excessive debt, rising intertest rates will be an obvious serious cash flow challenge. Roaring property prices are great for people with property, but you can’t use bricks to repay loans and increased repayments when interest rates rise, which they will.

It is likely that the heightened market volatility, which really began last month, probably will continue in December. However, presuming that the economic rebound proves to be sustainable, as it seems to be, then strong global growth will continue forward into 2022, and should lead to further market gains. If so, any market pullbacks would represent good buying opportunities for the long-term investor looking to add quality growth assets to their portfolio.

We, as investors, need to remember that the recent company reporting season here in Australia was very positive. The Fund Manager, Ausbil, notes in its latest Economic Outlook that “…confirming a full rebound in earnings, strength in balance sheets, and optimism across management teams, despite ongoing lockdowns. Moreover, this earnings rebound has been nothing short of astounding…from the (Covid-19 induced) decline in FY20 earnings.” It adds that, “…inflation impacts on costs were noted but not as a major concern, though we maintain a watching brief on any persistent inflationary impacts on balance sheets and earnings. The balance sheets of Australian listed companies are strong, and capable of supporting expansion in investments ahead as opportunity arises”.

For investors in growth-oriented assets, typically equities, property and infrastructure, 2021 has been a good year with good investment returns. For people in general it has been a tough year with lockdowns and other restrictions it has been a hard year. However, we can take solace and have real hope in that the future is looking brighter for us as people and for us, as true investors.  

Let this Christmas be a wonderful time for all, and a launching pad for a successful and happy year in 2022. And make your number one New Year’s resolution to keep up good long-term financial habits; they make for a strong and happy financial future!

As this year of 2021 draws to a close, all of us at FMA Wealth, sincerely wishes everyone a very Merry Christmas and a truly great New Year ahead!