Welcome to the JUNO Market Update.
Before we start, we want to acknowledge the distressing situation evolving in Eastern Europe right now. Our thoughts go out to everyone affected, and to those of you who have friends and family in this part of the world.
An event like this adds to an already volatile global market situation, and is impacting investments. During such uncertain times, it's always best to keep focused on your long-term goals, and keep calm. Please contact us if you are feeling unsure or worried about your KiwiSaver account.
Market Update in 8 minutes
We have included the latest NZ Herald and Pie Funds Market Watch video below. This features Pie Funds CEO + Founder Mike Taylor (Pie Funds actively manages the JUNO funds - read more about that here) and Liam Dann, the NZ Herald's Business Editor-at-large. They cover the market reaction to the Russia/Ukraine conflict.
We have also provided a transcript.
Market Watch March 2022 from JUNO Funds on Vimeo.
Liam Dann: Welcome to Market Watch. Today we are looking at the reaction of markets to the big news, the conflict in the Ukraine. With me I have Pie Funds CEO and Founder Mike Taylor.
Mike Taylor: Hi Liam.
LD: We’ve talked before about geopolitical turmoil and how markets cope with that. Have they reacted as you would have expected over the past few days?
MT: Well, certainly markets have sold off and we would expect they should really when we have one large political power threatening nuclear action against the rest of the world. So it's not surprising that markets have sold off in that environment. But perhaps at this point where things seem to have stabilized, people might be even surprised actually that markets haven't fallen further. So if we go back and look at history, at large sort-of geopolitical events or the commencement of war, markets do fall, but then they often tend to rebound quite quickly from those.
LD: So they’ve priced it in, or they price it in quite quickly. I guess the question is, what are they pricing in here? What is the direct risk to people's investments and companies?
MT: So I suppose what is priced in is that the sanctions are priced in, is that it will hit the Russian economy. It will affect those companies that are trading with Russia. So that's what's priced in. What's not priced in I guess is an escalation of the fighting that would spread throughout the rest of Europe, or indeed, indeed the worst-case scenario of nuclear weapons being used. So that's definitely not priced in by the market.
But at the moment, as we speak really, there are still peace talks going on. So probably investors are hoping positively for some kind of conclusion, I would expect, to the conflict in the coming days. So that's why the market has probably stabilized. If we don't have a conclusion, the fighting does escalate, then probably markets will turn lower again.
LD: With this conflict going on right now with the issues that we have in the world, with inflation, interest rates on the rise, I guess the secondary factor here is we've seen oil prices spike, energy… Russia being a huge supplier of energy to Europe, that impact on inflation, food prices as well potentially because Russia is big on wheat and fertilize. That could flow through to interest rates so markets wouldn't like that much either?
MT: No, so the central banks, in particular the Fed, are in a dilemma at the moment because this war is going to drive up short-term inflation. So you just mentioned from energy prices, food prices, it’ll drive up inflation. The issue then becomes… they will also slow down growth. So we’ll have higher inflation and slower growth, but then the Fed will be expected to do something to put a lid on inflation because they don't want a wage price spiral to continue. So that'll also put the brakes further on markets if rates do go up as they are forecast to for the rest of the year.
LD: I guess that is also a problem here in New Zealand with the Reserve Bank. Normally we might expect central banks to look through a short term geopolitical shock, but probably politically and socially, because of the real intense focus on inflation right now and how it’s been building through the pandemic, that’s going to be really difficult for them isn’t it?
MT: Politically they sort of have to do something, they have to put up rates and they have got to be seen as to keeping to their mandate because, you know, inflation and employment. So unless we see a change in the labour market, we should really expect that interest rates will go up this year. And that won’t change just because we've had a war in the Ukraine.
LD: I suppose it doesn't change the sort of underlying dynamic around what we think markets may do it, it possibly exaggerates it, but when you look at Wall Street and other parts of the world, what sectors in equity markets anyway, are being hit hardest by this current conflict?
MT: Well it seems to have been the same sectors which were actually sort of on the nose from the tail end of 2021. So the higher growth sectors. Sectors like technology, with revenue growth, but no earnings. So those have continued to sell off. I just saw that Zoom had an update today. If you look at Zoom as a classical example, the great pandemic winner that got to $400 a share, today is trading around $120- $130 - it’s had a massive fall. Whereas if you look at the other side of the equation, the energy names, the financials they've all done really well the last six months.
LD: So still pressure on those growth stocks. Some of the big names, I think a few months ago you were tipping Tesla as being quite overvalued. That seems to come back down to earth with a bit of a thump.
MT: Yeah Tesla, it has. Obviously it's a market darling, and it got to a really big valuation last year. That's fallen quite a lot, probably down about 30-odd per cent in recent months. Often I think that Tesla tends to sort of encapsulate market sentiment quite a lot and where Tesla goes to the market tends to go.
LD: Looking further out, in order for things to turn around… there's a lot of volatility. We've seen in New Zealand, the NZX off quite a bit in the past few months. What would it take to turn that around and get a rally going again?
MT: To get a sustained rally, I think it's probably going to need to be more of the second half of the year than in the first half of the year. We're going to need to see, in particular, the Fed but other central banks, change their view on the outlook for rate rises. So that means that rate rises we've got penciled in need to be pulled back. And that's probably likely to come once we get a moderation in inflation. And that's going to take time of course, it's not likely to happen in the next month or two. The downside to that is that if they're pulling back their rate rise expectations, that generally means as well that growth’s a little bit lower.
LD: Looking at an optimistic viewpoint here, the pandemic does seem to be easing around the world, even in New Zealand. Even though we’re peaking here with Omicron, we can see the borders opening. A lot of the things we hoped would happen are starting to so maybe that would be a bit of a relief on the supply side for inflation and could perhaps see central banks not having to go quite so far or fast as they've projected at the moment?
MT: Well certainly if the world does reopen, as we've expected in 2022, that's obviously positive for markets, positive for growth. So that’ll be a good sign and a good countermeasure to the slowdown that might be occurring as a result of higher energy and food prices.
LD: To sum up really, this conflict in Ukraine, terrible as it is, but when we look at it from a macroeconomic perspective, or from a financial market perspective, it is just another complication in an already very complicated scenario, but one that potentially we could see worked through over the next six months or so.
MT: It's hard not to see the humanitarian crisis that's coming out of this as well. But purely from an investment perspective, it's unlikely to have long-lasting effects on the markets, unless there's an escalation that we discussed.
- The Market Watch video series is produced in association with Pie Funds. View the original article here.
Information correct as at 1 March 2022. Pie Funds Management Limited is the issuer and manager of the JUNO KiwiSaver Scheme. Click here for our Product Disclosure Statement. Any advice is given by Pie Funds Management Limited, and is general only. It relates only to the specific financial products mentioned and does not account for personal circumstances or financial goals. Please see a financial adviser for tailored advice. You may have to pay product or other fees if you act on any advice. As manager of the Scheme we receive monthly fees that are determined by your balance and whether you are 13 years or over. We will benefit financially if you invest in our products. We manage any conflicts of interest via an internal compliance framework designed to ensure we meet our duties to you. For information about the advice we can provide, our duties and complaint process and how disputes can be resolved, visit www.junofunds.co.nz. All content is correct at time of publication date, unless otherwise indicated. Past performance is not a guarantee of future returns. Returns can be negative as well as positive and returns over different periods may vary. Please let us know if you would like a hard copy of this disclosure information.