October Newsletter – Investment Update & Global Events
The deeply troubling events in the Middle East have been dominating headlines and have also impacted investment markets. In the last few days, investment markets
Good afternoon,
Unfortunately the vast bulk of you will be reading this locked down in your homes.
The good news is that the financial year just ended was a strong year for our clients.
Many in the business community and the community in general have been somewhat confounded by the level of returns in the last year.
It’s explained by two key factors.
The Reserve Bank is holding the cash rate at 0.1% per annum. Many mortgages have a 2 in front of them.
When money is cheap not only does it make borrowing much more cost effective it also reduces the benefit of holding cash.
This in turn encourages investment in growth assets being equities(shares) and property.
The other factor is the huge global stimulus that was provided last year by governments around the world.
We had Job Keeper and business cash flow grants but every OECD country had similar schemes which pushed more money into the economy.
Firstly rising inflation is a real and key risk and the only effective way to get inflation under control is to increase interest rates.
Ultimately higher inflation means higher interest rates and lower investment markets.
The other key risk is a variant of COVID against which vaccines are ineffective.
It’s impossible to price this risk but the world still has significant cases of COVID and hence the possibility of a virus resistant mutation is increasing.
Given the huge stimulus injected into worldwide economies last year its difficult to see governments being able to do that again.
Right now equity markets are pricing in an opening of the worlds economies and in the US and Western Europe this is happening.
If this continues and interest rates remain low as a result of inflation pressures easing equity markets will remain strong.
In summation I think it’s reasonably easy to identify the key risks but much harder to quantify them.
It’s what investment markets do every day but a sudden change in interest rates or vaccine efficacy will significantly impact investment markets.
We are managing risk by investing with funds that offer protection on the downside, retaining holdings in conservative investments and holding diversified asset portfolios with significant exposures to commercial property.
If you would like more information on how we are managing investment risk in your own portfolio please let me know.
Regards,
John
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