Market Brief & Portfolio Performance Reports – January 2022

2022 has been very volatile for share markets so far, which can be pinned on one issue: stubbornly high levels of inflation, which markets interpret as a likely rise in the rate of interest, which impacts the value of most assets.

As a brief refresher, higher inflation brings with it, more often than not, a rise in interest rates (and the cost of borrowing) and in markets, interest rates have a tremendous bearing on the value of just about all assets, ranging from the assets in your portfolio (like shares and bonds) to other assets you might be exposed to including the value of housing.

We have prepared this video wrap up of the Northstar portfolios performance in 2021 and some thoughts on what’s ahead for 2022 – click below to watch now.

Inflation has become a key economic issue in the past year, due to the Covid induced supply chain disruptions we’re all experiencing. In Australia at a personal level we’re seeing this through bare supermarket shelves in the past few weeks, generally due to staff shortages (transport staff either away sick with Covid, or isolating due to being a close contact) and supply chain disruptions (getting goods off a boat). In another example, shops and cafes being have been struggling to hire enough staff to work for them.

The list of Covid impacts on business goes on but the market response will be the same – if it costs a company more to produce or procure something for sale, then eventually they have to pass on that cost increase by raising their prices – and this can lead to inflation. Earlier this week Australia recorded inflation that sits in the mid 3% level, higher than we’ve experienced for a long time. Thus, the rising inflation story has led markets to presume (and this is important) that interest rates could rise 4 or more times this year.

However, this is the current story, and as is often the case in markets, it’s worth looking at the counterargument.

Whilst Omicron has slowed business activity down, no question, the underlying conditions of the economy remain well positioned for a rebound once Omicron’s impact abates. Underlying economic conditions appear solid (for now anyway). Unemployment, probably the key measure for the general health of the economy is running at or close to generational lows in Australia. The same is the case in other developed economies like the US. Businesses are buying other businesses at a pace not seen for more than 10 years (which is read as favourable sentiment). Company earnings are strong (better than 20% growth year on year in the US) and are still expected to rise into 2023 and 2024. Governments continue to throw the kitchen sink at their economies to stabilise conditions. Interest rates, even if they do go up by, say 1%, are still extraordinarily low (a mortgage presently can be obtained for an interest rate of 2.25% – unbelievable!).

Thus, whilst the selling in share markets in the past few weeks is not welcomed and has been abrupt (and at times irrational), the investment committee’s thinking is that rates rising is the next phase in an ongoing recovery story – that is the transition from an era of ‘no interest rates’ which has been the case since Covid emerged nearly 2 years ago – to ‘low interest rates’. Although impossible to predict (and an opinion only), the thinking is that the ‘transition’ to slightly higher rates will continue during the course of the year and markets will absorb the increases gradually, and at some point later in the year the focus will be on a continuing recovery story. This of course presumes Covid outbreaks / waves are managed well (as before), corporate earnings remain robust, key economic indicators remain supportive and low interest rates prevail (i.e. rates don’t go up too quickly).

Whilst this is a cautiously optimistic view, it’s important to note that things can change abruptly with any one of a half dozen issues arising – most of these potential issues are raised on a daily basis on the news so isn’t worth rehashing, other than to point out that the world has had a half dozen potentially critical issues to contend with on a daily basis for a long time (these issues are always important but they don’t always impact markets).

Bottom line, 2022 will be bumpy from time to time, but it should also set the stage for a transition to a post Covid economic phase (where the economy has learnt to cope with Covid impacts) and with it, higher asset values. There’ll be opportunities along the way, and this is where the investment committee’s focus will be in the coming months.

Portfolio Performance Summary – Quarterly Reports

If you’d prefer a quick read, our portfolio summaries are here:

SHARE: