KiwiSaver Monthly Update for the month ending 31 January 2022What’s the latest?
Chief Investment Officer Mark Devcich provides the latest on what happened in markets during January.
January was one of the more difficult months as the thematics that persisted at the end of last year became exacerbated, and there were few places to hide.
Investors sold off stocks, especially faster-growing technology companies, as concerns about central bank liquidity withdrawals and increasing interest rates impacted valuations.
There was widespread selling in many sectors with the NZX50 off -8.8% despite containing more defensive-type stocks as interest rates increased. The ASX All Technology index was off 15% too.
The sectors which were relative outperformers were oil and interest rate-sensitive sectors like financials - sectors which we traditionally have little exposure to due to the poor returns on capital these industries typically generate.
Investors are also becoming more cautious about potentially over-earning companies due to pandemic tailwinds. We have seen some large-cap companies like Facebook, Paypal and Netflix fall more than 20% on their earnings reports as they reported an outlook of slowing growth in FY22. If the US large-cap stocks falter this year, it may be difficult for global markets to rally, given the significant weighting in indexes to them.
Currently, the market volatility is likely a valuation reset. Massive central bank economic stimulus pushed risk premiums down and asset prices up. Now this is potentially overflowing into the real world economy through higher inflation, exaggerated by disruptions caused to supply chains and labour movements from the pandemic. If inflation is persistent, further tightening may be necessary to prevent stable economic conditions from overheating. However, for a bear market to eventuate, it is most likely a recession would be required, and central banks would be closely monitoring to ensure interest rates are not hiked if economic conditions deteriorate.
Predicting markets is difficult, if not impossible, to do consistently. We prefer to spend most of our attention analysing companies and management teams to invest with over the long term, knowing growth in earnings per share is what drive stock prices. In the short term though, it pays to be mindful of what the market tells you about industries or particular companies. I think the falling share prices of many companies are symbolic that investors were capitalising over-optimistic scenarios about their future growth, while paying a high valuation for those earnings. Our mistake is we have been slow to realise this about some companies in our portfolio where we should have reduced exposure earlier. The positive is for the long-term investor lower prices mean higher future returns and in this environment, the high volatility is creating much more opportunity than would normally exist.
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What does rising oil prices mean for investors and consumers?
CEO + Founder Mike Taylor gives the latest on the increasing oil prices.
Rising oil prices is not normally good news for investors or consumers, unless you have shares in oil companies of course! We do not invest in oil at JUNO. Higher oil prices feed into not just petrol, but many of life’s consumable goods. It is bad for those on low incomes, because usually during periods of inflation, they experience a decline in real income. Basically what that means is that prices go up more than wages, so you not only feel poorer, you are poorer.
Are oil prices headed back above US$100 a barrel?
This year, I think commodities will stay strong and oil will break US$100 a barrel as we recover from Covid. I remain an oil bull because I think the compound effect of a lack of exploration investment in the past five years, Covid recovery, and a slow switch to alternative energy could drive oil prices significantly higher, until they reach a price point which forces change.
Why has there been a lack of exploration investment in the past five years?
From the mid 2000s until 2014, oil exploration experienced a boom, with prices above US$100 for much of that 10-year period. However, with the movement to ESG (Environmental, Social, and Governance, often referred to as sustainability or social conscience) and Covid-19, there has been a lack of investment in new oil exploration projects because the price has been too low AND there has been a lack of funding. The upshot is that today, we find ourselves in a market that is potentially undersupplied, just as the world is recovering.
What about alternative energy?
Oil is still in demand, and at the current pace of switching to alternatives, oil is still expected to keep growing for another decade or so. But they say the cure for higher prices is higher prices – so let’s see how the world reacts if oil gets to US$150 a barrel. Over the last few years, oil has been cheap so the desire, or need if you like, to switch to alternatives has been subdued. But with higher oil prices, that will force governments and consumers to accelerate the timeline.
Information correct as at January 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.