A choppy start to 2022

10 February 2022 by Lifetime

A choppy start to 2022

Following on from an unusual 2020 and 2021, 2022 is already looking to provide some unique opportunities and challenges. With Omicron spreading quickly around the world, and making an entry into the New Zealand community, it is no surprise many investors are worried about how it will affect their investments. The good news is that high vaccination rates, and Omicron’s milder symptoms, have allowed for less onerous restrictions on businesses. Many businesses have also had time to prepare and develop their online and contactless capabilities, allowing them to continue operations throughout Covid surges and community lockdowns.

What’s happening in the markets?

It’s been an eventful start to the year. Tensions have been rising between Russia and Ukraine and central banks around the world are looking to raise interest rates after cutting them to record low levels to support economies that were forced into lockdown. These low interest rates created a lot of ‘cheap money’ and investors benefitted as a result. Global share markets have risen strongly since 2020, with low interest rates helping meaningfully.

Economies have rebounded and we’ve seen inflation rear its head for the first time in decades. Central banks are beginning to respond by raising interest rates which have caused share markets to wobble as investors come to terms with returning to more ‘normal’ central bank policy settings. Most share markets in the developed world have fallen, although have since partly recovered to finish January down around 6%. Context is key though – this just puts share markets back where they were last October. Booster's KiwiSaver Balanced Fund (which diversifies across cash, fixed interest and share investments) is down around 3% in January, and despite the recent volatility, is still up 5% over the past 12 months (after fees, and before tax).

Responses in portfolio management

There are a range of tactics that can be employed in such market conditions, and these are driven by your goals, risk profile, and investment strategy.

In some portfolios, we look for opportunities to capitalise on this volatility as well as manage risks through the use of ‘shock absorbers’. We use a combination of strategic planning and good risk management to find positions that we believe will benefit your investment.

An example of a ‘shock absorber’ is strategic currency management. As we are a small, open economy, our New Zealand Dollar (NZD) tends to fall in value when there is uncertainty in global markets. And as the NZD falls, it adds the value of your overseas investments, which is why we can leave a portion of global shares investments ‘unhedged’ and free to move with foreign exchange rates. So far this year, the NZD has fallen around 3%, supporting the value of overseas investments.

In the bond market, we have seen central banks start to raise interest rates, as the Reserve Bank of New Zealand did late last year, when it raised the OCR from 0.25% to 0.75%. As interest rate expectations have risen, bond yields have risen, and bond prices have fallen (bond yields and prices move in opposite directions). Our investment partner Booster added some protection against this exact scenario, last year when they sold some of their global bonds. They continue to monitor the global bond market for the right opportunity to buy back these global bonds at more attractive prices.

For those investors holding Booster portfolios, have been active in share portfolios, tilting portfolio towards industries that hold up better during periods of market uncertainty (known as defensive industries). For example, earlier in January they increased exposure to US healthcare companies. Not only does the healthcare industry perform better during periods of uncertainty, but demand for healthcare has grown with the rapid spread of Omicron.

Putting volatile markets in context

It’s important to remember in times like these that volatility is a part of life in long-term investing. In fact, historically it’s typical for share markets to see a 10% decline (similar to what we’ve just experienced) every two years on average. Investing is a long game, which is why it is important to have an investment plan that suits your time frame and your ability to ride out shorter term volatility.  Sticking to a well-chosen plan is key, while we continue to focus on monitoring your investments to capture opportunities and manage risks along the way.

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