Investors are being warned they need to prepare for lower returns in 2022 as the prospect of higher inflation – and continuing uncertainty over Covid-19 – impact markets.
Andrew Bascand, managing director of investment management company Harbour Asset Management, says returns are likely to be in single digits across-the-board for the next few years – even as he also thinks the prospects for investors remains good.
"The general warning we're giving is that returns are unlikely to be the same as last year, or even the last five," he says. "This is partly because they have been at higher than normal levels in that time, but also because we expect high inflation may be more persistent.
"Petrol, energy, rents and wages are all rising. Mortgage rates have increased 1.5 to 2 per cent since the middle of 2021 and many households will soon be exposed as almost 70 per cent of outstanding mortgages are either floating or fixed for less than one year.
Bascand, who was speaking late last year, made his comments as New Zealand figures showed consumer prices rose by 2.2 per cent in the September 2021 quarter, taking the annual increase to 4.9 per cent, the highest in a decade.
"We think this trend could be more persistent than previously thought and investors will need to closely watch the implications of higher interest rates on their investments."
Bascand says while it would be easy to make a list of all the uncertainties and problems – "a list that just seems to grow" – at the same time he says he sees factors more good than bad from an investment perspective.
He says this optimism is, in a sense, born out of the experience of 2021. "It was a rather surprising year. Despite the health crisis (caused by Covid-19) we've seen a dynamic world economy respond to the challenge through innovation in health and tech industries and by significant increases in production and employment.
"Many New Zealand and Australian reported strong profit growth last year and as we stand at the beginning of 2022 US and European corporate earnings are up to 20 per cent higher than they were pre-Covid-19. Unemployment in many countries is only marginally higher and is expected to trend lower (than the level before the pandemic)."
He says the New Zealand unemployment rate was, at 3.4 per cent to the end of the September quarter, one of the lowest since records began.
Bascand says these and other factors are contributing to a positive outlook for 2022. "Households have done well, consumer confidence is high, equity markets have excelled and governments are investing heavily in infrastructure and health.
"We also think the outlook for growth in the near term is still good in spite of a backlog in demand for goods and low inventories."
But Bascand says core challenges apparent over the last two years have still not been solved.
"There is inflation but there is also the pandemic – and this could play out in many different ways especially over the next year. Our leadership will still need to lean on boosters, vaccine passports, new treatments and continue to react to things such as the capacity of our hospitals.
"Science has so far done a good job of reacting to Covid and this gives us confidence, but all of these issues will be politically challenging."
Bascand says there are growing challenges over climate change. However last year's COP26 conference in Glasgow in which 200 countries pledged to continue cutting carbon emissions (with a goal to reduce to net zero emissions by the mid-21st century) was a cause for optimism - and highlighted why growth stocks that are part of the energy transition may be "attractive investments."
"COP26 has given us a roadmap to follow and measure progress on the climate change journey," he says. "One thing is for certain, capital markets are alive to the challenge of not only looking after the planet but looking after people by considering our social responsibilities around wellness, inequality and poverty."
Bascand says global government debt has increased almost 15 percentage points since 2019 according to the International Monetary Fund (IMF) to cushion the impact of Covid-19 and he says the question of whether this will impact the ability of governments to cushion against the next negative shock ought to be a consideration for investors.
"For investors with at least a three to five year horizon, we think that a well diversified portfolio can still deliver reasonable returns."
For more information go to: www.harbourasset.co.nz
This article does not constitute advice to any person (www.harbourasset.co.nz/disclaimer).