The recent Federal Budget saw the government cite the following economic considerations:
- the present state of the economy post-COVID,
- a worsening economic position due to inflation
- increased global instability,
- rising interest rates and cost of living pressures.
Those in business are all affected by the above conditions and we are experiencing:
- low un-employment leading to staff shortages and upward pressures on wages,
Unfortunately we do not see any good news in the short term and we appreciate that it can be quite confusing for the average investor particularly when we go from a bull (strong rising market) to a bear market (to a falling market).
The Investors “cycle of emotions” kicks in as they are tested on their understanding and conviction regarding their wealth plan and strategy. At this point we routinely like to remind our clients of the following decision pathways:
- Rest – stick to your long term wealth plan, leave investments as they are so that their reduced balances can recover when the market rebounds, “ride it out”.
- Invest – if you have accessible money then many successful investors will invest further at this time to take advantage of the lower asset prices, “buy cheap now and sell high later” , the “double down” approach.
These options rely on your faith that markets will recover as they have done so in all of the previous falls.
It is rare that an adviser would agree with selling investments at a reduced price and reducing risk and volatility by reinvesting, the reason is that this makes the current unrealised loss into a real and permanent loss. But in some exceptional circumstances where the longer term is not the view there may be reasons for people to consider such actions.
There is no one size fits all solution here, our blogs from earlier this year may help to explain this further:
June https://vjc.com.au/what-to-do-now-the-world-and-markets-have-turned/
May https://vjc.com.au/market-volatility/
Feb https://vjc.com.au/another-world-event-causing-market-volatility/
So it seems like a good time to remind our clients that their wealth strategy and the investments have been selected to suit their needs and changes now should only be considered if your circumstances have substantially changed.
The following are some take-aways from a recent research update on the market:
- Higher interest rates indicate tighter financial conditions and lower rates indicate an easing in financial conditions, we all understand both here and abroad interest rates are rising.
- As interest rates continue to climb the explicit goal of central banks in order to curb inflation with a material slowdown in economic activity.
- Developed countries that are raising rates have an increasing probability of experiencing recession at some point in the next 12 months
- These tighter financial conditions normally result in lower returns for equities in general, but especially for growth stocks. Many investors in the recent bull market have exposed themselves to growth investments.
- Property values are sensitive to interest rates increases, Australia has not raised interest rates since the mid-2000s but the last the last time property prices corrected was in 2018 when the United States raised interest rates. The interconnected nature of global interest rates is interesting because as we know this time around as nearly every developed nation is increasing rates simultaneously.
- This is a timely reminder of the need for diversification and the value of a professional investment manager – both of which our clients have.
But even the professional managers have trouble with the many variables and unpredictability of the markets, some global data to illustrate how many variables are in play and why it is hard to achieve an outcome every time for professionals:
- The USD is the strongest it has been since the year 2000, the primary reason is the pace and size of interest rate increases to stop the inflationary pressures. Higher interest rates mean it is more enticing to park money in USD due to the higher returns on cash.
- Japan has been unable to raise rates in fear of grave economic damage as they currently have a debt-to-GDP ratio of 259%.
- Europe are dealing with a war and the subsequent energy crisis that has been in the works since 2021.
- The UK have suffered a loss of confidence after poor policy decisions and a restart of quantitive easing.
- Australia has been the best performing currency out of these as domestic issues are relatively stable compared but property and share prices have been affected and inflation exists.
As mentioned above the raising of interest rates increases the probability of experiencing a recession at some point in the next 12 months. This is going to be felt most by Europe as they deal with an energy crisis and war whilst heading into the winter months as they struggle with already limited energy sources
The best possible outcome today: A positive route out of this negative situation would be if inflation begins to moderate heavily over the coming months. This would decrease the need for central banks to keep raising rates and could result in a strong bounce in equities, property and bonds.
This does not remain likely for the next couple of months and we don’t know when.
So at best central banks are likely to pause hiking rates at some stage in 2023 and then a recovery should follow.
General Advice warning: the information in this article is general in nature, it is not advice specific to your needs. If you want to act upon the information in this article then you should seek advice from a qualified professional. VJC WM accepts no liability to any party for acting from this information unless they have sought advice in a formal engagement with VJC WM for this purpose.
