By RFS Advice CEO Paul Forbes

There has been a bit of a rebirth of old games in my household with three students home for the summer, really going to miss them when they go back to university….

I think like many of you I started 2022 all ready for a different year.  2021 behind us, states reopening, international travel back on the menu and high levels of vaccination taking care of that pesky virus.

Instead we get this!

In my Christmas message to the team I had warned that with the state opening up, we would have to look at office protocols in January as we expected to see an increase in cases. I did not foresee how rapidly our next variant would take Queensland by storm.  When we walked back in the door on the 5th of Jan we already had two staff isolating after testing positive for Covid 19 – one quite sick – and then on the morning of our first day back we had a slightly sniffily colleague utilise a rapid antigen test (RAT) and test positive, so we sent her home as well.  Not quite the start I was envisaging.

With a little foresight we had secured some RATs for the office but quickly worked our way through those as family members, clients and friends became close contacts or tested positive.  Suddenly we went from not knowing anyone with Covid19, to everyone we talked to, had a close contact who was positive.

So to the article title, “this is not the 2022 I was looking for!”

In my last article for 2021, I talked about inflation and interest rates and that ‘transitory’ inflation was a term being over-utilised by commentators who wanted to talk down possible interest rate rises (https://www.rfsadvice.com/a-watched-pot-never-boils ). In January we are seeing a very different dialogue with examples like this Bloomberg article talking about the US Federal Reserve lifting rates five times in 2022 (Goldman-sachs-predicts-fed-will-raise-rates-five-times-this-year ).

Importantly the ‘5’ increases will take it from near zero to 1.25-1.5% so not quite alarming as the title but this signals a shift in strategy that we are seeing play out in volatility.

Yes, world and domestic sharemarkets have seen a reversal in January of some of those extraordinary returns we saw last year but from an advice point of view, we are seeing this as a release of steam rather than the start of a major correction.  

We could be wrong but as per our most recent communication, we don’t just wait for markets to turn and then react – we prepare for volatility and take regular steps to manage risk as part of our process.

So what is the market reacting too?

Interest rates have gone from near zero to projected rises, although the Australian Reserve Bank has just reaffirmed no rise yet for us. 

  • Inflation is now accepted and though the current levels around the world are exaggerated by supply chain issues, wages growth is part of the equation and is here for the long term.  Some inflation is good and hence our domestic target of 2-3%.
  • The ‘QE’ or quantitative easing we have seen during the GFC and further into the pandemic is now slowing and in the US, has stopped.  They are no longer ‘printing’ money which will slow access to easy money.  You don’t need to prime the economy when you are running close to full employment.
  • China is still reeling from its property funding issues and there has been a flow on effect post Evergrande to other smaller but still very large property developers.  Defaults are largely contained to Chinese domestic banks which are ‘state owned’ but this is likely to have an impact on Chinese prosperity. Chinas-looming-property-crisis-threatens-economic-stability  This article talks to the importance of property in the Chinese domestic economy – something that is also mirrored here.

Interestingly, analysts would argue letting these developers default and slowing the domestic property market, while painful, is actually probably good policy.  The demographics of the one child policy (introduced in 1980 and reversed in 2015), is going to have an impact within this next decade and new demand for housing may soften as the younger workforce becomes scarcer and the aging demographic accelerates.

  • We have tensions between Russia and the Ukraine and the potential escalation into a kinetic conflict – though there are a lot of alternative scenarios which involve cyber-attacks rather than military confrontations.
  • We also have energy issues within Europe, the UK and to a limited extent in the US.
  • Beyond all this we have Omicron and a massive increase in cases though thankfully without the corresponding increase in hospitalisations and deaths.

I could add political bickering in the UK and here, refugee concerns, China/Russia alliances and our own domestic border disputes.  This all adds up to ‘uncertainty’ and we would argue that is what you are seeing in current market volatility.

Remove all that noise and you have:

  • Better market opportunities at current prices;
  • Strong earnings growth in many good quality companies that have low inventories so need to increase production;
  • Almost record low unemployment both here and with our major trading partners.  This leads to wages growth and increased discretionary spending though inflation is always a risk
  • Rising rates but more a return to normalised rates;
  • Very high levels of vaccination and barriers to travel coming down;
  • High levels of accumulated savings both here and in the US ($250 billion of increased savings in Australia during the pandemic and $US2.3 trillion in the US); and
  • A housing boom that has outstripped supply in many states (maybe not Victoria as they have moved here to the Gold Coast).  As supply chains ease we can expect building to regain momentum.

Finally, even though it can never happen fast enough, we are leaving Covid behind.  Borders are opening, international tourism will restart, offshore students will return, mask wearing and ‘checking in’ will disappear, elective surgeries will return to 100% and kids will be back at school permanently (yeah!). 

We could see this by the end of 2021 and pragmatically (not overoptimistically) you can see it changing on a week to week basis as we move into 2022. By the end of March, we will be a lot closer to the next normal and that may well look like the Australia we are far more used to.

The media won’t let this happen without a fight but you can just watch the Winter Olympics (or your favourite streaming service) and ignore them for the moment and I don’t think you will miss a thing!