Tuesday’s decision by the Reserve Bank of Australia (RBA) to increase interest rates has only added to what has been a bumpy start to the year in both share and bond markets. Markets like certainty, they thrive when the future can be accurately predicted. Much of the current uncertainty relates to inflation, which can perhaps best be described as the idea that the price of things – for example, a basket of groceries – goes up over time. Moderate inflation is generally viewed positively, particularly when it is accompanied by economic growth. High inflation may become more of a problem as the cost of living goes up.
So why is this important right now? Well, it’s because recent inflation data has come in at a level much higher than many expected; indeed, Australian inflation is at its highest level in more than 20 years. And with this comes expectations that to manage the situation the RBA will need to raise interest rates faster, and by more than previously anticipated by the market. This has also had a meaningful impact on interest rates, and in particular bond markets, with bond prices falling by amounts not seen since the 1970s.
So where does this leave us? In truth, inflation and interest rates are difficult to predict at the best of times, let alone when navigating a period of extreme economic conditions like we are experiencing. The list here is long but a few that you will be aware of include:
- The ongoing effects of the pandemic;
- The impact that the pandemic is having on the supply of everything from labour to materials and the food we buy at the supermarket;
- The rapid increase in the price of commodities including the fuel that we put in our cars;
- And of course the destabilizing effect of the ongoing Russian invasion of Ukraine.
Given the difficulty in predicting both inflation and interest rates, investment portfolios are constructed in such a way that they hold assets that typically do well in an inflationary environment, as well as others that would be expected to prosper should inflation expectations soften. The lens through which assets are added to portfolios is valuation – or simply said, “are they a good deal, do they represent good value?”
All in all, while it remains an uncertain investment environment, we believe we have set our clients portfolio’s up to be appropriately positioned to achieve their longer-term objectives. Can you say the same for your own investing?
The 25th of May was the 126th anniversary of the commencement of the Dow Jones Industrial Average, its birthday if you wish. The chart below covers all 126 years since the Dow commenced back in 1896, a period that includes times of significant uncertainty from the Great War to the Depression of the 1930’s, World War II, the Global Financial Crisis of 2008 and the recent COVID 19 Pandemic.
The one certainty that the chart reflects is that markets, whilst they will reflect current uncertainty, given time will continue to grow.
As always, please let us know if you have any questions or if we can be of any assistance.
If all of this makes you feel anxious about the impact on your financial future, get in touch with us for an obligation-free chat. We understand that you might feel overwhelmed by the barrage of news, fake news, information and misinformation. Our job is to help you make sense of it all and bring it back to how it might impact on you. All you have to do is Get Started or Book an Online Consultation.