There is now international agreement that high inflation can no longer be viewed as “transitory” and both inflation and interest rates will continue to rise.
However, despite this, MFAS remains strongly of the view that a well-diversified portfolio, which contains assets which profit from rising inflation and interest rates, will be more resilient through this business cycle. We are also positive on investment markets generally, as indicated by the latest earnings season, which has shown many companies have strong balance sheets and are well poised for the re-opening of global economies.
Demand side is being driven by rising global vaccination rates, the reduced severity of Omicron and medical breakthroughs in vaccines and antiviral medication such as Merck’s ‘miracle’ pill, Molnupiravir, which has been ordered for New Zealand (and whose parent company is owned in clients’ growth orientated portfolios).
At the same time, Supply is struggling to keep pace, with supply chain disruptions continuing and record low unemployment and border restrictions making it difficult for companies to find staff.
While it took time for US Fed and Bank of England (BOE) to accept that inflation was more strongly imbedded than they had first perceived, they have now started the Quantitative Tightening (decreasing the amount of bonds they will buy) and BOE has already raised interest rates twice since November 2021 and the Fed has now indicated it will start increasing rates this month.
Locally, the NZ Reserve Bank has been much more pro-active with three interest rate hikes since October 2021 and more have been strongly indicated.
The Russian invasion of Ukraine is horrific and an appalling indictment on humanity. Over the short-term this has increased the price of many commodities, particularly oil, corn and wheat although this is unlikely to have a long-term effect on investment markets. It is important to note, that as a socially responsible investor, NZ Funds have no exposure to Russian investments within any of their portfolios.
When a degree of normality returns to the world, there will be considerable upside in economic growth-sensitive sectors. These include technology, global travel and leisure, global supply chains, food, and renewable energy (including low carbon emission commodities) with many of these sectors now trading at less than half their previous peak values. This growth will not be evenly spread across the economy, but rather selected companies and sectors will do much better than others. This will highlight the benefits of stock selection through active management in comparison to holding all-inclusive index funds.