The Russians are coming! The Russians are coming! You may remember the title of a movie many decades ago. Quite an apt one in today’s ‘news of the day’. This cry has certainly been the focus of late around the world (media assisted, of course).
The actual ‘invasion’ this week by Russia of its neighbour, Ukraine, was probably not quite expected to the extent just seen. Many experts thought surely Putin would not be bold (and dumb) enough to do what he has just done. But he has, and now Russia faces, as it should, the condemnation and the ensuing wrath of the world via sanctions, bans, and sheer separation. I doubt if many Russian people support the aggressive action of their autocratic and dangerous leader, but sadly they will suffer through shortages of many things if this saga goes on.
The other reason this neighbour war is of focus is that there generally has been peace from mini-wars around the globe during the past years, especially is the case in Europe. Alas, this outbreak is now becoming the new televised war, as were the Gulf and Iraq conflicts of 1990 and then 2003. Although, the Ukrainian situation will probably, and hopefully, be just a short one; although the sceptic in me belies that the media will drag and exaggerate this as much as they can and do with headings on this being the start of the new WWIII. No wonder young people are fearful of what is being portrayed by the media.
Understandably, the new conflict in the Ukraine (there was a similar one there in 2014 too, which we sadly also remember for the downing of MH Flight17 during that affair) is creating some nervousness and market volatility.
This macro uncertainty is despite seeing most restrictions and having nearly all countries with their borders now open and a ‘back to normal business’ approach after the two hard years of Covid-19 and the uncertainty and adverse impacts it brought around the world. Yet, people are fatigued from the pandemic’s duration. We have learnt to ‘live with the virus’ and in the main we have combatted it, but people are probably sensitive and even fearful of any new concerning events or happenings, even if such events are really of no direct and even minimal, if any, indirect effect on them!
Putting the Ukrainian situation aside, the fundamentals for improving domestic and global economic advancement, and in investment growth appear well in stride, as anticipated. Fundamentals are looking good. Rising inflation and higher interest rates are factored in to the main. This risk does remain that these may be a bit higher than first thought. With the US Fed expected to move on increasing official interest rates next month, this should provide more tangibility on further increases. The days of ‘free money’ are effectively over, and with rising interest rates, we are seeing a change in how things will look ahead. Although this is all quite anticipated, there remains some uncertainty which can, and does, make markets jumpy in the short term.
Nevertheless, as true investors, we know and understand that we must not forget facts and fundamentals are what matters, as does having a dedicated long-term outlook. We are seeing a return to normality. However, the markets were somewhat volatile even before the sudden Russia/Ukrainian event this week and the lead up to it. One benefit, of course, there are cheaper and good quality investment assets now available to buy in such a period of volatility that we are seeing the markets in now!
As the fund manager, Hyperion Asset Management, recently stated in its report on this; “The current (six-monthly) global and domestic reporting season has delivered some truly remarkable results. However, with markets trading on short-term momentum, non-fundamental macro news flow and self-reinforcing negative feedback loops, short-termism and fear have pushed fact and fundamentals from a rational market”. Yes, short-termism and fear are the enemies of true investing. And, so, what does media always sadly (and irresponsibly) focus on, yep, and we know it is rarely on facts and fundamentals!
Importantly, as investors we do remember what really matters is what price you pay for an asset, what price you receive if/when you sell the asset, and what net returns/income the asset delivers to you while you own it, which may be for a very long while. The price of an asset today is not relevant if you are not buying or selling it today, is it? Really, most of the rest we see and hear is avoidable noise. The key to successful investing too is to build a diverse mix of quality assets that will, overall, deliver growth and income to you over time. Sprinkle that with some patience and with courage in times of volatility, and it presents very well for a reliable and rewarding wealth strategy!
To my above commentary, I have also included below a punchy article published this month by the Dr Shane Oliver, Head of Investment Strategy and Chief Economist with AMP Capital. His words provide short and sharp insights into the past year and what the year ahead has in store. Here is Dr Oliver’s simple point-form summary of key insights and views on the investment outlook. Worth the read and it makes good sense.
Investing in 2022: a list of lists
By Dr Shane Oliver
Six things that went wrong in 2021:
- Several Coronavirus waves disrupted economic activity.
- Inflation took off as Coronavirus boosted spending on goods and disrupted production and supply chains.
- Some key central banks started to remove monetary stimulus earlier than expected, with some raising rates.
- Bond yields surged.
- Chinese growth slowed sharply.
- Geopolitical tensions with China, Russia and Iran stayed high.
But there were three big positives:
- Science and medicine appeared to offer hope of getting on top of Coronavirus. This saw less severe illness through the mid-year Delta wave compared to the 2020 waves.
- As a result, the broad trend was towards global reopening.
- Monetary and fiscal policy remained ultra-easy.
As a result, global growth is estimated to have been nearly 6%. This drove strong profit growth and, along with low rates, saw strong returns from shares and other growth assets offsetting losses in bonds.
Four lessons from 2021:
- Inflation is not dead – a surge in money supply under the right circumstances, in this case, massive fiscal stimulus and supply shortages, can still boost inflation.
- Shares climb a wall of worry – particularly if earnings are rising and interest rates are low/monetary policy is easy.
- Timing market moves is hard, and the key is to have a well-diversified portfolio. Despite lots of worries, sharemarkets overall surprised with their strength but some sharemarkets (eg in Asia) and bonds performed poorly.
- Turn down the noise – investors are getting bombarded with irrelevant, low-quality and conflicting information that confuses and adds to uncertainty. So, one of the best approaches is to turn down the noise and stick to a long-term strategy.
Seven reasons for optimism on economic growth:
- Coronavirus could finally be moving from a pandemic to being endemic – more on this below.
- Excess savings in the US and Australia will help to provide an ongoing boost to spending.
- While US Federal Reserve and likely RBA monetary policy will tighten this year, in AMP’s opinion those policies will still be easy. It’s usually only when policy becomes tight that it ends the economic cycle and the bull market – and in our view, that’s a fair way off.
- Inventories are low and will need to be rebuilt, which will help boost production.
- Positive wealth effects from the rise in share and home prices will help boost consumer spending.
- China is likely to ease policy to boost growth.
- While business surveys are down from their highs, they remain strong and consistent with good growth.
Global growth is likely to slow this year but to a still strong 5%, with Australian growth of around 4%, despite the Omicron virus wave resulting in a brief setback in the March quarter, in AMP’s opinion.
We have revised down our March quarter Australian GDP forecast by 1% to 0.6%, but revised up subsequent quarters by the same amount.
Four reasons for optimism regarding Coronavirus:
- Vaccines are still providing protection against serious illness – particularly once booster shots are administered.
- New Coronavirus treatments are on the way, which should aid in the treatment of the more vulnerable.
- Omicron is more transmissible but less harmful (evident in far lower levels of hospitalisations and deaths relative to the surge in new cases compared to past waves) and so could come to dominate other variants.
- Past Covid exposure is likely to provide a degree of herd immunity.
Combined, this could set Coronavirus on the path to being endemic where we learn to “live” with it. South Africa, London and New York are possibly already seeing signs of a peak in Omicron.
Of course, the risk of new variants that are more transmissible and more deadly remains – which is why it’s in the interest of developed countries to speed up global vaccination.
Key views on markets for 2022:
Still-solid economic growth, rising
profits and still easy monetary conditions should result in good overall
- Global shares are expected to return around 8% but expect to see a rotation away from growth and tech-heavy US shares to more cyclical markets.
- Australian shares are likely to outperform, helped by leverage to the global cyclical recovery and as investors continue to search for yield in the face of near-zero deposit rates but a grossed-up dividend yield of around 5%.
- Still-very-low yields and a capital loss from a rise in yields are likely to again result in negative returns from bonds.
- Unlisted commercial property may see some weakness in retail and office returns, but industrial property is likely to be strong. Unlisted infrastructure is expected to see solid returns.
- Australian home-price gains are likely to slow with prices falling later in the year as poor affordability, rising fixed rates, higher interest-rate serviceability buffers, reduced home-buyer incentives and higher listings impact.
- Cash and bank deposits are likely to provide very poor returns, given the ultra-low cash rate of just 0.1%.
- Although the Australian dollar could fall further in response to Coronavirus and Fed tightening, a rising trend is likely over the next 12 months, helped by still-strong commodity prices and a decline in the $US, probably taking it to around $US0.80.
Five reasons to expect more volatility:
- Inflation – while it’s likely to moderate this year as production rises and goods demand subsides, it is likely to be associated with ongoing scares and the risk that it’s higher for longer.
- The start of Fed and RBA rate hikes and quantitative tightening – monetary policy is unlikely to get tight enough to threaten the economic recovery and cyclical bull market, but monetary tightening could still cause volatility.
- The US mid-term elections – mid-term election years normally see below-average returns in US shares, and since 1950 have seen an average drawdown of 17%, albeit with an average 33% gain over the subsequent 12 months, according to AMP analysis.
- China/Russia/Iran tensions – a partial Russian invasion of Ukraine could lead to even higher European gas prices.
- Mean reversion – shares are no longer cheap. The easy gains are behind us and calm years like 2021 tend to be followed by volatile years.
Six things to watch:
- Coronavirus – new variants could set back the recovery.
- Inflation – if it continues to rise and long-term inflation expectations rise, central banks may have to tighten aggressively, putting pressure on asset valuations.
- US politics – political polarisation is likely to return to the fore in the US, posing the risk of a deeper-than-normal mid-term election-year correction in shares.
- China issues are likely to continue – with the main risks around its property sector and Taiwan.
- Russia – a Ukraine invasion could add to EU energy issues. (In play as we know!)
- The Australian election – but if the policy differences remain minor, a change in government would likely have little impact.
Nine things that investors should remember:
- Make the most of the power of compound interest. Saving regularly in growth assets can grow wealth substantially over long periods. Using the “rule of 72”, it will take 144 years to double an asset’s value if it returns 0.5% per annum (ie 72/0.5) but only 14 years if the asset returns 5% per annum.
- Don’t get thrown off by the cycle. Falls in asset markets can throw investors out of a well-thought-out strategy.
- Invest for the long term. Given the difficulty in timing market moves, for most it’s best to get a long-term plan that suits your wealth, age and risk tolerance and stick to it.
- Diversify. Don’t put all your eggs in one basket.
- Turn down the noise.
- Buy low, sell high. The cheaper you buy an asset, the higher its prospective return will likely be and vice versa.
- Avoid the crowd at extremes. Don’t get sucked into euphoria or doom and gloom around an asset.
- Focus on investments you understand offering sustainable cash flow. If it looks dodgy, hard to understand or has to be justified by odd valuations or lots of debt, then stay away.
- Seek advice. Investing can get complicated and it’s often hard to stick to a long-term investment strategy on your own.
As always, should you have any queries please do not hesitate to contact us.