A long-term investment plan will guide investors through a pullback in sharemarkets. Photo / Bloomberg
A long-term investment plan will guide investors through a pullback in sharemarkets. Photo / Bloomberg
It hasn't been pleasant for share investors this year as markets have been struck by volatility and uncertainty through rising inflation and the Ukraine War. But this isn't the time to panic.
"It's important that investors stay calm and stick to their long-term investment plan that prevents you from making emotional decisions," says Matt Henry, Forsyth Barr's head of wealth management research.
"That's why we have a plan that acts as a guide through the good and bad times, and doesn't let the emotions dominate. These are difficult times and it's understandable that investors feel disconcerted.
"People have to appreciate that volatility is part of investing in shares. That's the price you pay for getting the higher returns over the longer term," Henry says.
By the end of last week, the benchmark S&P/NZ50 Index had fallen 18 per cent this year, the Australian S&P/ASX 200 was down 13 per cent, and two leading United States indices, S&P 500 and Nasdaq Composite, were stuck in a bear market.
The S&P 500 had fallen 21 per cent this year and Nasdaq Composite, dominated by the battered technology stocks, had slumped 30 per cent. The Dow Jones Industrial Average, which tracks 30 of the largest US companies, was down 16 per cent.
The share prices are back to the levels of more than two years ago, eroding the gains of the sharp post-Covid market recovery.
Sharemarkets have succumbed to rising inflation — 6.9 per cent in New Zealand, 8.6 per cent in the US and 9.1 per cent in the UK — and the impact of the Ukraine War. The central banks have had to move faster and hike interest rates to get inflation under control.
The New Zealand Reserve Bank moved first, increasing the official cash rate (OCR) from 0.25 per cent to 0.5 per cent in October last year, and by last month the OCR reached 2 per cent, its highest level since 2016. The bank predicted the rate would be as high as 3.95 per cent by June next year.
These moves predictably increased mortgage rates and placed pressure on household spending and budgets as the cost of living rises.
Though deposit rates have increased, the high inflation is presently snuffing out real gains.
Henry says for quite a while central banks sat there being patient and thinking the inflationary pressures — first caused by Covid and supply disruptions — will alleviate in time.
But the combination of multi-decade high inflation and demand for higher wages, causing businesses to increase prices, became embedded and the central banks lost patience waiting for the imbalances to normalise.
"There is now a growing concern that the interest rate increases will create softening economic conditions and even a recession."
Henry says "we are in unprecedented times and the outlook for the global economy is uncertain. We have experienced the first global pandemic in 100 years and the first major conflict in Europe since World War 2. The Ukraine War exacerbated the Covid disruptions.
"The world is such a connected place compared with 30 to 40 years ago and forecasting the global economic climate is particularly challenging."
Henry says the major drivers of inflation have been:
- The change in spending patterns around the world — with people locked down they switched a big portion of their spending from services (such as travel and hospitality) to goods (cars, televisions and furniture) - The difficulty of global supply chains to scale up and meet this increased demand — made doubly hard by Covid disruptions to manufacturing and logistics, resulting in soaring freight costs.
Goods shortages have been self-perpetuating. Retailers and consumers, concerned about running short, have made excess purchases and stockpiled. It looked like the supply chain constraints would start to ease, but then Russia's invasion of Ukraine added another blockage and pushed up the price of important commodities, including oil and grain.
Henry says China's persistence with its zero-Covid policy and resulting lockdowns in the world's largest exporting economy has compounded disruptions.
"There are early signs that those pressures may be peaking. As economies reopen, spending patterns should revert — more services, less goods — and help alleviate pressures on physical supply chains.
"Many commodity prices are off their peaks and container shipping costs have eased back to the lowest levels since July last year. And used car prices — the largest single driver of US inflation over the past year or so — are now falling.
"There is a growing possibility that the global inflation picture may improve by the end of the year."
Henry says it's critical for investors to appreciate bear markets are a regular event, occurring on average every five years.
The last one in March 2020, when Covid struck, was shortlived and lasted six weeks — the shortest bear market in history.
Matt Henry, Forsyth Barr's head of wealth management research. Photo / Supplied
The previous one during the global financial crisis in 2008-09 lasted 17 months and was the longest since the Great Depression in the 1930s. On average the bear markets have lasted nine to 10 months.
"It's very difficult to time markets," says Henry. "That's why we sit down with clients to establish a long term investment plan reflecting their needs and situation and ability to bear these sorts of events."
Typically, Forsyth Barr will create a balanced portfolio of 60 per cent shares and 40 per cent bonds.
"One of the silver linings of the rise in interest rates is that bonds are now delivering some reasonable returns," he says.
"Two years ago bonds were delivering interest rates of 2 per cent and now issues are approaching 6 per cent. Inflation is running at more than 6.9 per cent but bonds are longer term investments."
Henry says investment plans are set up to enable clients to access cash when markets are falling and they still need income. Even though share prices are coming off, companies still provide dividends and bonds pay interest.
"We mitigate the scenario of having to sell at the wrong time.
"The investment plan has a time horizon. You have to sit back and say over the long term the market will do a good job in navigating crises.
"Most of our clients have been with us for a long time and have been through this experience before. The newer clients who have been in the market for the last 12 months or so have only benefited from the good times.
"They are the ones who will be more concerned. But a period of turbulence is also a good time to canvas the landscape and see where more attractive opportunities may emerge.
"When you get periods of pullback, you can look around and see stocks that have been over-priced reaching a price that provides an attractive opportunity," says Henry.
