Create the life you want
We commence a new year after one that many would like to forget. However, following a wild start to the year in the markets, many are asking, “What’s ahead for 2022?”
For anyone watching the investment markets, or those caught up in the seemingly endless barrage of negative financial media reports, the start of 2022 has been interesting to say the least.
Reports of ‘out-of-control’ inflation, ‘unexpected’ interest rate rises, ‘lockdowns’ due to Omicron, geopolitical instability and ‘expensive’ share markets, have driven market volatility. Unfortunately, this is something that is likely to continue for some time to come. It is in these times that it is important to take a step back from the chaos and the herd mentality and take a different, calmer perspective of things.
Throughout history investment markets have risen and fallen, driven by any number of factors, each reportedly ‘changing the paradigm’ each time. Only to fall back in line with fundamentals after an appropriate period of time has passed.
In short, every one or two years there are reported reasons to panic. However, time has shown that long-term discipline is rewarded, as illustrated by the graph below:
Growth of $1 from 1970 to $80 in 2020, invested in the MSCI World Index including dividends (source Dimensional Fund Advisers).
What has proven the test of time are some enduring fundamental investment principles, which are summarised below. These principles form the foundation of our investment philosophy and are employed in the construction of your investment portfolio, as a client of Chrysalis Lifestyle Planning:
- Markets move in cycles, yet over the longer term they reward investors for their investment. Keep your perspective and stick to your time horizon.
- The higher the potential longer-term return, the greater the potential short- term volatility.
- ‘Timing’ the market to ‘sell-high’ and ‘buy-low’ consistently over the long term is virtually impossible to do. History shows that staying the course almost always provides a better long-term result.
- Diversification of your investment portfolio, within and across different asset classes, is the best proven strategy to reduce risk.
- Investment decisions driven by emotion generally ends in tears.
The Morningstar chart below measures the performance of the top 97% of Australian listed shares by capitalization and shows how missing the five best months since 2001 results in a portfolio with a 33% smaller balance (excluding fees and taxes).
With a grounding in the above investment fundamentals, what is the Chrysalis Investment Committee’s current view for 2022 and beyond?
Inflation / Interest rates
It is the Committee’s view that in developed countries, such as Australia, UK and the US, inflation is likely to remain elevated for the 1st half of 2022, before moderating as supply chain bottlenecks ease, immigration opens up again and interest rate rises begin to contain inflation. The level of inflation is expected to settle at a higher level than over the past decade, due to issues such as the transition to a decarbonised society adding to costs (at least in the early stages). However, the rate is expected to fall within an acceptable range as these central banks continue to target a rate of between 2% and 3% over the longer term.Central banks are now moving to a tightening cycle, which is expected to put downward pressure on inflation and a return to trend growth levels over the course of 2022. Once inflation begins to roll back, market volatility is expected to stabilise as focus returns to long-term fundamentals.
It is expected that strong household savings, continued business spending and increased productivity, the reopening of global trade and increased private sector demand still have further to play out through 2022. This should underpin strong economic activity throughout the year ahead.
Omicron
While the Omicron variant put a handbrake on the global recovery over the Christmas and New-year period, it has proven less severe and is not expected to have a lasting impact on the global recovery.Shorter term, it has delayed the unwinding of supply bottlenecks and added to inflationary pressures. However, with each new variant, developed economies are bouncing back faster. With improvements in vaccines and the treatment of Covid, future variants are expected to be less severe and will have a reduced impact on the global economy. That said, there still exists the potential for a more deadly variant to develop, to which vaccines could be less effective. This would clearly have a significant impact on the global recovery timeline.
Geopolitical Instability
Geopolitical instability often generates short-term volatility. The impact and severity of which is dependent on the specific countries involved and speculated political responses that may result.
With the current tension between Russia and the Ukraine, should conflict eventuate, it is expected to result in a downturn in markets over the short term. However, this is not currently expected to be sustained for the medium term unless the US and NATO become directly involved in the conflict rather than simply applying sanctions and supplying the Ukrainian government with support in some form.
Unfortunately, geopolitical instability is a consistent theme throughout history It is best managed by taking a proactive long-term focused approach to developments as they actually occur, in contrast to trying to manage by speculation around the numerous scenarios, many of which will not eventuate.
Share Market
While share price valuations are elevated in several regions when compared to their long-term averages, earnings growth is expected to drive positive returns in 2022, as it did in 2021, albeit to a lesser degree this year.
Domestically, pent-up consumer demand, low cost of money, favourable business conditions, along with increased productivity and technology utilisation, are all expected to prevail throughout 2022 across most industries.
In short, quality investments, selected by superior active fund managers should continue to outperform in 2022.
Feel free to contact our office to speak with your adviser if you would like to discuss any of the above content or other financial planning matters. Please also feel free to pass on our details to someone you feel we may be able to assist with their financial affairs, as we’re only too happy to help where we can.
