Market Update: Riding the Headwinds

If the last leg of 2021 was marked by the arrival of the Delta variant in New Zealand, other headwinds have unexpectedly emerged of late, resulting in an extremely volatile first quarter which has extended into April and May.

In this market update, we’ll once again take a closer look at the factors and trends currently playing out in the global economy. And as always, we’ll share some practical guidance for investors looking at navigating this complex environment with confidence.

The impact of inflation

The most significant headwind at present is the rapid emergence of inflation. This is undoubtedly the key concern for financial markets at this time   It doesn’t matter where you are or what you’re buying – you’ll likely be experiencing an increase in prices. And there are no signs in sight that inflation is set to disappear in the near future.

Besides price inflation, wage inflation is also becoming more and more apparent. That’s the by-product of labour markets being constrained due to the reduced movement of people between countries. At both a local and global level, a vast number of industries are experiencing an acute shortage of labour: this in turn puts pressure on wages, which puts pressure on prices, in a vicious cycle that’s difficult to break.

Central banks only have one tool in their toolbox to control inflation at the moment – and that is interest rates. In this attempt to try and curb inflation, interest rates are rising (or will rise) across the board. But the reality is, monetary policy is a blunt instrument. The risk now is crossing the fine line between curbing inflation and driving the global economy into a recession, or causing the property market to suffer a substantial correction.

In this case, timing is everything. It's a delicate balancing act, and pushing things too hard, too fast, or being too slow to act may lead to undesired consequences.

China’s zero-Covid strategy and global supply

While most countries are slowly returning to some normalcy, and even New Zealand is starting to welcome international travellers again after two years of shut borders, Covid is still making its presence felt in China.

The country remains determined to keep its zero-Covid policy in place through massive lockdowns in some of its largest cities. This is affecting the manufacturing capability of the Chinese industry, as many simply cannot, or are unable to, run their factories at all or anywhere near full capacity. And as a result, supply chain issues are exacerbated with the delivery of many goods and services taking longer, potentially pushing up retail prices even further.

Ukraine war and the quest for energy supplies

At the start of the year, the prospect of a war in Europe was very low. In a matter of weeks, this became a reality and has greatly unsettled Europe as they ponder ‘What’s or Who’s next?

This ‘black swan’ event has shone a spotlight on Europe’s reliance on Russian fossil fuels, raising key question marks around how the EU plans to obtain energy should Russia turn off the tap or reduce supply. If that happened, it would force companies and businesses to either halt or slow production, which in turn could have a significant impact on economic growth.

It’s not clear how things will evolve from here on out, but it’s a safe bet to assume that volatility will be prevalent in that part of the world for the time being.

Managing market opportunities and risks

Markets react to uncertainty with volatility. And in times like these when uncertainty is everywhere, for investors there’s basically nowhere to ‘hide’. So, the most robust line of defence continues to be holding a well and highly diversified portfolio of quality assets.

If your goals and objectives haven’t changed, and you haven’t had a material change in circumstances since you last reviewed your investment strategy, in many cases the most appropriate course of action is to hold the line and let the turbulence pass. In the past, the market has shown time and time again that investors who remained invested through periods of uncertainty are well-rewarded on the other side.

Besides taking a ‘hold the line’ approach, there can be benefits to being proactive as well. If you have funds available to invest, now is a good time to consider averaging or drip-feeding into the market over an extended period of time.

Warren Buffett once said, “Be fearful when others are greedy and greedy when others are fearful.” When others are greedy, typically share prices increase and investors need to be cautious not to overpay for an asset. When others are fearful, and shares lose value, there can be good value buying opportunities up for grabs.

This is what our portfolio managers do: they look to find opportunities. Remember, just because the share price of a company has gone down, it doesn’t always mean that the company itself is a bad investment; in many cases, it just means that those shares are now more affordable.

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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 financial advice.