Good morning,  Happy New Year.

As we ponder what 2022 has in store from an investment perspective I find it instructive to look back at the predictions of past years. Many of the predictions of the  worlds best economists and the largest investment houses have invariably proved inaccurate.

As 2019 started investment houses were pretty gloomy and the year ended up being one of the best ever. As we all know too well Covid hit our and investment markets consciousness in March 2020.

It goes without saying that no one predicated the huge crash and spectacular recovery that followed. The course of Covid and its new variants is not forecastable in the short term so I will not attempt to.

Other than Covid the main preoccupation of markets as we move into 2022 is inflation. Concerns around inflation are justified and real. 

Inflation is basically caused by lots of cash chasing a limited supply of goods and therefore pushing up prices.

Governments have been throwing money out on an unprecedented scale and that combined with record personal borrowings as a result of record low interest rates has hugely increased the money supply.

Combined with all the disruption to world wide supply chains goods have increased in price and some hugely. So the result is a record amount of money chasing a limited supply of goods.

Inflation in the US is currently at 7.2% which is the highest annual rate since 1982. With that level of inflation Reserve Banks and Governments have to act. The main tool they have at their disposal is interest rates. Increasing interest rates reduces the supply of money by increasing its price.

The current interest rate in Australia is 0.1% as set by the Reserve Bank.  So one thing we can say with a degree of certainty is that the only way is up.

Investment markets don’t like increasing interest rates as it increases the costs of borrowing and reduces spending.

Basically investment markets are expecting an increase in interest rates and its factored into share values.

However if interest rates increase more than expected that will lead to a downward movement in share markets.

What we are doing as a result is focusing on investments that provide sustainable income and avoiding sectors highly exposed to rising interest rates such as fixed government bonds which will drop in value as rates rise.

Recently tech based companies have been sold off due to increased rates but this does not change the fact that over time many of these companies are set to benefit from a range of structural head winds such as flexible working.

So concluding what we are doing is focusing on long term investments that have structural benefits and in the short term protecting portfolios where we can from rising interest rates.

If you would like to discuss your own investments please get in touch.

Regards,

John