Welcome to the KiwiSaver Monthly Update for the month ending 31 March 2022
What's the latest?
Guy Thornewill, who is Head of Research for UK & Europe and Senior Investment Analyst, based in London, gives the latest on markets this month.
The market rally during March was not a huge surprise, but the extent of it was, erasing all the market losses since Russia invaded Ukraine. Furthermore, newsflow during the month generally got worse, from a geo-political, economic and corporate viewpoint. The war in Ukraine, despite some occasional peace negotiations, shows little sign of letting up, with atrocities only getting more serious as time goes on. Commodity prices remain high and volatile, further exacerbating ongoing inflation problems. This could spill over into additional wage inflation – a situation most central banks are very keen to avoid.
On the corporate front, profit warnings have been accelerating as companies get hit by higher costs from still elongated supply chains and rising raw material prices, plus difficulties in hiring or retaining staff. In some areas, end demand is now softening as governments have largely withdrawn Covid-related stimulus measures. The upcoming first quarter earnings season could well be ugly.
So why were markets so strong? A key factor is that the US consumer, while showing reduced confidence levels, still has a robust balance sheet with high excess savings. US consumer spending is a key barometer for the health of the global economy, and there is a view that this will remain strong with further help from upcoming tax rebates. Another point is that we seem to be exiting the worst of Covid, except for some Asian countries like China. Additionally, the Biden administration took the decision to release 1 million barrels per day of oil from its Strategic Petroleum Reserve, helping to bring down the oil price at least in the short term.
Markets are walking a tightrope though, with the hope that investors don’t look down and begin to panic. In this moment, and especially after the March rally, caution seems warranted. Earnings downgrades for many sectors, except energy, are likely to continue. Consumer spending will face pressure, especially in Europe, as people try to cope with higher energy and food prices, and the threat of the war in Ukraine remains a clear and present danger. If food price inflation increases further the chance for unrest in regions such as North Africa and the Middle East increases – we have already seen rioting and a currency collapse in Sri Lanka.
Forward-looking economic indicators are not flawless, but a yield curve inversion in the US, where the 2-year yield rises above the 10-year yield, is seen as a reliable indicator of a forthcoming recession. It just inverted. (You can find out more about the yield curve inversion in the latest Market Watch video update here).
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Higher interest rates and higher inflation
CEO + Founder Mike Taylor gives the latest.
I’ve taken to the habit lately of writing Sunday evening musings for the investment team. My focus for the last couple of weeks has been, what are the implications for higher inflation and higher interest rates?
Starting with inflation, we already had significant inflation throughout those economies that used extensive monetary and fiscal stimulus during the pandemic, namely the US, UK, Europe and, of course, New Zealand, BEFORE the war in Ukraine. That was expected to normalise over the course of 2022 to a more modest 3% (from 7.9%). Now however, inflation is expected to remain stubbornly high due to ongoing disruptions to supply chains, raw material, commodity increases, and wage pressure. I do not know when these issues will resolve, but they will. The question is, what will it take?
This brings me to the next point, higher interest rates. Central banks’ key role is price stability, which is even more important than their other goal of full employment. The tool du jour is to raise interest rates to a point where the economy slows, and this will naturally bring down the inflation rate. However, this is such a delicate procedure that almost every rate-hiking cycle ends in recession. Of course, central banks aren’t living in a vacuum, they know this, and will actively try to avoid that outcome. As most recently evidenced by Jerome Powell, in the December 2018 pivot where the US Federal Reserve quickly reversed course from their hikes to cuts. So back to my earlier point, predicting the future is not what we do. We can assess the facts that are in front of us today, and make investment decisions using a set of assumptions which we believe to be our best estimates. But life is not linear, things happen that you least expect.
The biggest lesson I have learnt about investing is it’s not all about home runs. Risk management is actually the most important part of an investment strategy. Manage your risk well and if you are around long enough – good things should come your way. Warren Buffett didn’t get rich quick, he got rich slow.
The key risk that we need to assess is whether Russia might turn out to be the canary in the coal mine for a whole raft of global changes and create an inter-generational shift in both economic and geopolitical events. Read stubbornly higher inflation, de-globalisation, green energy, and shortening of supply lines. All of these we are currently assessing and analysing to determine if this is a new paradigm that we must all adjust for.
Going up, going down
In this new section, Mike Taylor looks at one stock that has gone up, and one stock that has gone down.
Novo Nordisk: +20% (for the past month as at 11.4.22)
Novo Nordisk A/S is a Danish multinational pharmaceutical company headquartered in Bagsværd, Denmark, with production facilities in eight countries, and affiliates or offices in five countries. As a company, Novo has been performing particularly well in the past few years as its new wonder weight-loss drug has received FDA approval. In the last month, the stock is up mainly as investors look for the safety of healthcare stocks during uncertainty.
Pets at Home: -12% (for the past month as at 11.4.22)
Pets at Home is a UK pet supplies retailer selling pet products including food, toys, bedding, medication, accessories and pets. It is listed on the London Stock Exchange. After a strong rise through the pandemic due to increased pet ownership, Pets at Home sold off recently on concerns of higher costs impacting their margin. However, the last update from the company was in January, and that was a profit upgrade.
Crazy things in the investment world
We delve into crazy things that are happening in markets.
People love their cars right? But how much is your favourite car worth on the open market? The most expensive car sold at auction in March was, get this, a French 1937 Talbot-Lago, where someone paid a staggering US$13.425m. More money than sense, as my Mum used to say.
Information correct as at 31 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 reliable indicator 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.