Market Update - January 2022
2020 was one for the history books, said to be the worst global recession since World War II. 2021 was better… or was it?
The answer to that depends very much on who’s writing and where they live. The intention of today’s report isn’t to reflect long on the past, but to frame our thoughts for what may lie ahead. Yet, as we contemplate 2022, it’s difficult to escape the force of 2021’s gravitational pull.
NZ’s Central Bank was one of the first movers on interest rates, our OCR pushing 200% higher through 2021 (now at 0.75%). The RBNZ also signalled by 2024 it could be as high as 2.60%. The extent and velocity of rises from here will vary depending on many factors. Tightening monetary conditions are always used to slow rising prices, to moderate spending.
The word on the lips of those in charge is inflation, pondering if its presence is transitory or permanent? No one really knows, so don’t be surprised if it swings either way. Central Bankers do seem to be working with the facts and when these change, they too change (their minds). The media openly criticise them for this dancing but, maybe this is the best we should hope for. Policy mistakes in the past have often caused a deepening recession or even worse.
In June 2021, it was possible to fix a housing mortgage for two years at 2.50%. Today the two-year fixed rate is 4.35%. On a debt of $500,000, this shifts monthly repayments over a 25-year term up nearly $500. Said another way, it costs $6,000 net more each year to service the same debt. With interest rates likely rising, for many at the margin, this could be problematic.
Much money was saved in lockdown and, as vaccines have given passage to more freedoms, demand for everything has gone gangbusters - in particular, property prices have exploded. If not for Omicron moderating our behaviour, we’d imagined a tsunami of travellers. That wave may yet break onto the global economy in 2023. Today, we remain in a “wait and see” variant.
It’s complex, because everything is connected. As Isaac Newton described in the year 1687; “For every action (force), there is an equal and opposite reaction”. As we write, the world economy is expected to grow at 5% in 2022. That expectation is already priced into assets. If growth is less, asset prices likely fall. If it is more, they rise. If not for the arrival of Omicron, we imagined that global demand would turn away from manufactured goods (factories around the world haven’t kept up with new orders) and consumption would shift back to service industries (travel, hospitality, entertainment, etc). So, in terms of next steps for the world economy, what happens in the USA in the coming months really matters. Their bond buying program is rapidly diminishing and we anticipate their cash rates rising (inflation in the USA is sitting close to 8% and they’ve not seen the likes of that in forty years). If more pressure should come on oil prices, well that simply escalates inflation and interest rates push higher faster.
Large savings amassed through 2020/2021. Some good returns were achieved across many asset classes (and some are still rebuilding). Today, labour markets are tight and despite inflation, interest rates remain below pre-pandemic levels.
In Summary - The world economy is in relatively good shape heading into 2022 and with the world’s health professionals focused, Covid risk is a known known. Other risks could yet emerge, and we’ll deal with those as they unfold.
Despite what the media may say, no one knows when markets will consolidate, but it is very normal for them to do so. Autumn follows Summer, Winter before the Spring. We think 2022 will “muddle along”, with more extreme ups and downs, as many aspects of the economy grapple with rapidly changing conditions. We still expect a sentiment shift toward service industries (as we get on top of Covid), and that will generate a new box set of investment opportunity.
Tony Munro | CFPCM, Post Grad Dip. Bus.Studies (PFP), FSP 5501
The views and opinions expressed in this article are intended to be of a general nature and do not constitute personalised advice for an individual client. A disclosure statement is available on request and free of charge.