Quarterly newsletter, March 2022

Seven US rate rises expected

The most recent quarter saw global equity markets enter correction territory for the first time since the outbreak of COVID 2 years ago. Markets, forward looking as they are, finally see interest rate rises crimping the cost of capital, as the economic stimulus around the world is finally pushing demand in an enduring manner. While the war in Ukraine has been in the headlines, the real economic news is the return of inflation to developed economies globally. Inflation began to feature around October 2021 and was passed off as transitory by many participants.

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Central banks have largely held fire on rate rises until this year on the basis that they do not want to kill the demand they’ve been stimulating since the start of 2019. The view now is that inflation is running well ahead of the target 2-3%p.a. level with latent stimulus, supply chain issues and the Ukraine war acting to accelerate price rises. The expectation in the U.S. is for more than 7 rate rises in the next year. Locally the tone is for a slightly slower pace of rate rises.

We are carefully watching how the withdrawal of US$95billion per month by the US Federal Reserve from the U.S economy affects equity prices. Similar, albeit smaller stimulus removal programs are occurring in other developed economies. There is a high likelihood that volatility will return to asset prices. Essentially, when free money is no longer available assets have to be priced on more traditional metrics.

For investors, volatility is both threat and opportunity. Property is a perfect example, interest rates act to push down prices while inflation is usually good for property prices. Locally, our economy has emerged from the Omicron news that dominated markets with more momentum than we’ve seen in many decades. Demand for Australian agricultural and natural resources is currently at an all time high.

Current demand for our exports are akin to levels seen in the 1970’s. Historically, such times lead to large increases in economic prosperity for the Australian population. Real wage growth flows, unemployment remains low and governments can both spend and save at the same time! The lucky country again perhaps?

Returns for the 9 months are below

  • All Ordinaries: 7789, up 204 points or +2.68%
  • Listed Property Accumulation 200 Index 64525, up 3717points or +6.1%
  • 90 Day Bank Bills 0.23%, up 0.03% or 760%
  • AUD vs U.S. Dollar $0.7480, up 2.22cents or 3.10%
  • Dow Jones Industrial Avg, 34707 points, down 1631 points or -4.48%

Guardian Investments Pty Ltd ABN 18 608 506 261 is a Corporate Authorised Representative of Guardian Associates Pty Ltd AFSL 238281. This page reproduces commentary published in March 2022 and is general advice only. It has not been tailored to your objectives, financial situation or needs, and the figures were current at the time of writing. Past performance is not a reliable guide to future returns. Seek personal financial advice before acting on it.