15 June 2022
A challenging time for investment markets
Investment markets have been extremely challenging over the last few months. Since setting a record high in January 2022, the US sharemarket has lost around 20% of its value.
These challenging times have come about for several reasons:
- COVID lockdowns in China have tied up container traffic in Asia, meaning many businesses are struggling to obtain the materials and stock they need to operate. In the housing construction sector, for example, a global timber shortage is affecting many types of timber products – including frames, trusses, hardware, and fit out materials (such as doors, jambs and architraves). These shortages have contributed to inflation, but have also negatively impacted business profitability.
- The war in Ukraine and economic sanctions against Russia have placed additional strain on oil and gas supplies, which has raised the cost of energy worldwide. Since most businesses are net energy consumers this has increased the cost of doing business.
- While COVID restrictions are easing in most western countries, international travel is still in the doldrums. Consequently, employers are reporting staff shortages in all sectors of the economy. The impact has been especially felt in sectors that rely on working tourists such as agriculture, hospitality and retail. This also affects businesses in other parts of the world that rely on tourist spending and tourist labour.
- Inflation has risen sharply due to the above factors, which raises the likelihood of interest rate rises. Higher interest rates are bad news for most companies because it increases financing costs, and therefore reduces profits.
- Rising bond yields have also caused bonds to fall in value. Bonds are typically held by more conservative investors. So even risk-averse investors have been affected by the downturn.
Think before you switch
While higher interest rates cause investment markets to rerate, they also raise future returns. For example, if the yield on a bond has risen from 1% pa to 3% pa, then the long-term return has also risen from 1% pa to 3% pa. Rising bond yields are painful in the short term, but improve returns over the long term.
Markets are generally quite smart at anticipating the future. So the bad news on supply side pressures, the war in the Ukraine and rising interest rates are now fully reflected in market pricing. While that adjustment has been painful, it is probably over. While more bad news could trigger further declines, it is equally likely that good news will cause markets to rally. Share markets have declined to the point where valuations now appear relatively cheap, and prospective returns look healthy.
While switching investment options in volatile investment markets may give you some comfort now, over the long-term it may reduce the earning potential of your super, meaning less money in retirement.
For most people, super is a long-term investment. This means you should avoid letting short-term performance influence your long-term investment strategy.