Market Update: Feeling the (inflation) pressure

December 1, 2021

It’s been three months since our latest Market Update (Weathering current uncertainty – August 2021), and back then, New Zealand had just entered its second nationwide lockdown. No one could have predicted that Covid-19 restrictions would be a marathon, rather than a sprint this time.

Three months on, alert levels are being phased out and replaced with a new traffic light system, vaccine passes are now available for fully immunised people, and New Zealand prepares to re-open its borders to the world.

In this update, we’ll look at the underlying factors and trends that are likely to shape the next few months. This is based on our experience and knowledge of the markets, and it’s meant as guidance only: it does not replace personalised financial advice. If you have any questions about your unique circumstances, please don’t hesitate to contact your adviser. In the meantime, enjoy the read.

Delta: A tale of two halves

Since the return of Covid-19 on our shores, in August, the Delta story has been a tale of two halves: Auckland and the top of the North Island on one side, and the rest of New Zealand on the other.

We’ve heard a number of Auckland-based clients (particularly business owners) express concern and immense frustration about how restrictions have affected their financial and personal resilience. With recent announcements around Auckland’s and New Zealand's borders reopening, there seems to be a speck of light at the end of the tunnel with many people tentatively planning to reconnect with friends, family and recommence business operations.

The MIQ changes announced on 24 November for fully vaccinated travellers have been welcome news for Kiwis who are currently stuck overseas, and for those amongst our clients who have been separated from their families in the UK since 2020.

On a side note, it’s comforting to hear other clients have adapted well to the remote environment and are finding new ways of operating. Those who can work remotely are certainly at an advantage in the ‘new normal’. From our perspective, we’re lucky enough to be in a business that can work everywhere. And we’d been preparing ourselves to work remotely even before the pandemic, as part of our business continuity programme. Of course, we couldn’t foresee Covid-19 (just as anyone else), but we knew it made good business sense to protect our operations in the event of a natural disaster or an IT issue. We ended up using our newly implemented systems much sooner than we had anticipated.

A closer look at the economy and the markets

In our August update, we talked about how the world was cautiously redefining what ‘normal’ looked like, with the economy playing wait-and-see both here in New Zealand and on the global stage.

If we look at global markets, up until recently most companies have continued to report earnings or profits, in many cases exceeding expectations. But we are starting to see headwinds on the horizon.

The fallout from Covid continues, and while economies are restarting in many parts of the world, another Covid-19 variant as disruptive as Delta could unhinge the recovery that we’re currently seeing globally.

Another key risk comes from the inflationary pressure, which most economies are reporting. It’s not yet clear if the high current levels are just transitory or embedded in the economy. Only time will tell.

What we know is that prices are going up, compounded by supply chain issues, and the main tool that central banks have in their toolbox to keep inflation under control is interest rates. Again, how much and for how long is not known, but we’ll likely be seeing more interest rate increases, and that may translate into heightened market volatility. We’re already watching some of it unfold. In September 2021, some markets reported negative results, on the back of the good performance they had had to that point.

Also, there’s some concern around China’s large property developer Evergrande Group and its struggle to meet debt obligations. On the basis that it’s not able to, experts warn that it may create a contagion effect across other companies.

And lastly, while year to date global equity markets have performed strongly, the NZ share market has underperformed. At the time of writing, the S&P/NZX 50 is tracking below 2011 levels, having fallen almost 2.3 per cent year to date. If we look at the Australian S&P/ASX 200 Index and the leading US indices, so far they have increased almost 13 per cent and 20 per cent respectively.

However, the weak results we’ve seen this year shouldn’t distract us from the fact that the NZX has delivered exceptionally good returns in the past decade. The bottom line is that no one can guess which market will perform the best, and this is why we adhere to a fully diversified approach when managing our clients’ investment portfolios.

How you can minimise investment risk

On the flipside, we must also acknowledge that some companies are doing extremely well. Our approach, as always, is that timing the market is impossible. So if you’re an investor, and not a speculator, we recommend you remain with the strategy you’ve agreed with your financial adviser – unless there has been a material change in your financial circumstances.

In these times of heightened volatility, it’s all-the-more important to avoid making impulsive decisions. The best line of defence is to hold a highly diversified portfolio that has quality assets, and at NZBritannia, we make investment decisions based on our own sound fundamental research and models. Within our portfolios, a client on average would be exposed to approximately 5,000 individual investments across different asset classes, industries, and countries.

The bottom line? Make sure you don’t have all your eggs in one basket. We have many ‘baskets’ all around the world, and that’s what we want for our clients.

Have recent events got you thinking?

The ‘existential’ nature of this pandemic has prompted many people to reassess their life, their priorities, and their financial goals. You may have had more time to think, and the opportunity to analyse what’s important to you.

A number of our clients, for example, have contacted us to discuss their retirement planning needs, something we encourage everyone to do well in advance. As financial advisers, we’re here to help you create and protect your wealth. But we also like to spend time helping clients with other aspects of their life – and just be a sounding board amid the uncertainty.

So if you have any questions or would like to talk, not necessarily about a financial issue, please don’t hesitate to contact us. We’re in your corner.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.