Paul Huxford
Chief Investment Officer
ANZ Investments
As you may have seen in the media, equity markets have started 2022 on the back foot. Their weakness comes as signs of inflation in many parts of the world has raised the likelihood of interest rates having to increase from their historical lows. When interest rates rise, equities can underperform. Geopolitical tensions in Europe also have investors on edge.
In the US, the closely-watched S&P 500 Index has fallen by more than 5%, while the growth-orientated NASDAQ 100 (which comprises of a number of technology companies) has declined by more than 10%, as at 21 January. Equity markets in Europe, Asia and Australia have also fallen, taking their lead from the US.
Concerns around inflation and rising interest rates have also seen bond markets fall.
New Zealand’s equity market has not been immune to the falls, with the NZX 50 Index down around 5%, while bonds have also been weaker.
One of the key jobs of central banks is to keep inflation under control. However, due to the COVID-related supply disruptions and a shortage of people to take up jobs, the price of many goods and services has shot up – and is well above what is considered to be normal.
Central banks can tackle inflation by raising interest rates. In doing so, they increase the cost of borrowing, and this can discourage investment and dampen household spending – which in turn can lead to a cooling of prices.
This can flow through to company profits, and explains why equity markets can fall when interest rates rise.
In the US, most investment commentators now expect its central bank to raise interest rates four times in 2022.
In fact, this is a sharp about-turn in expectations, as less than 12 months ago, many did not expect to see US interest rates rise until 2023. It’s this change in sentiment that has sent markets lower.
Meanwhile, in New Zealand, the Reserve Bank of New Zealand looks set to continue to steadily raise interest rates this year.
Adding to the current uncertainty in markets is the geopolitical situation in Eastern Europe, amid fears that Russia may be on the verge of invading Ukraine.
We know that it’s hard seeing the value of your investments going down. But it’s important to take a step back and remember just how well equity markets have performed of late.
Over the last three years, the S&P 500 Index in the US has delivered annual returns of more than 15%, and in two out of three of those years it saw gains of more than 25%.
This was despite some sizeable falls in equity markets brought about by the COVID-19 pandemic.
While instinct may tell you to switch to a ‘safer’ investment option, having patience is usually the best strategy in unsettling times. In March 2020, when equity markets fell on the back of COVID-19 concerns, we saw a lot of investors switch out of growth-oriented funds into more conservative ones.
However, it meant that many missed out on the rebound in markets that followed.
The moral of the story? Stay the course. It’s hard to predict when markets will change direction, and trying to pick the best times to change funds comes with risk.
Paul Huxford, Chief Investment Officer, ANZ Investments.
At ANZ Investments, we have a team of over 20 investment professionals based here in New Zealand, who are always looking out for your investments – we don’t just take a ‘set and forget’ approach.
The team takes a hands‑on approach and this, alongside having well-diversified investment funds, allows us to capitalise on any opportunities and can help smooth out the rises and falls that financial markets are experiencing at this time.
Market falls are part and parcel of investing, so it’s best to focus on what you can control. The news headlines may well be full of doom and gloom and markets could remain turbulent for some time.
However, we believe maintaining a good investment discipline and staying focused on long-term goals is now more important than ever.
This information is issued by ANZ New Zealand Investments Limited (ANZ Investments). The information is current as at 27 January 2022, and is subject to change. This material is for information purposes only. Although all the information in this article is obtained in good faith from sources believed to be reliable, no representation of warranty, express or implied is made as to its accuracy or completeness. To the extent permitted by law ANZ Investments does not accept any responsibility or liability arising from your use of this information.
We recommend seeking financial advice about your situation and goals before getting a financial product. To talk to one of our team at ANZ, please call 0800 736 034, or for more information about ANZ’s financial advice service or to view our financial advice provider disclosure statement see anz.co.nz/fapdisclosure
ANZ Investments is the issuer and manager of the ANZ KiwiSaver Scheme, ANZ Default KiwiSaver Scheme and ANZ Investment Funds. Important information is available under terms & conditions. Download a copy of the guide and product disclosure statement.
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