Article written by ANZ Investments – 25th January 2022

As you may have seen or read, equity markets have started 2022 on the back foot. The weakness comes as inflation in many parts of the world remains at decade-highs, which has seen investors prepare for higher interest rates – a scenario where equities can underperform. Furthermore, geopolitical tensions in Europe have exacerbated the pickup in volatility.

How have markets performed so far this year?

Since the start of 2022, in the US, the S&P 500 has fallen more than 5%, while the growth-orientated NASDAQ 100 has declined more than 10%, as at 21 January. This also dragged other international equity markets lower as well. Meanwhile, the concerns around inflation and rising interest rates have seen the US 10-year government bond yield make a two-year high above 1.85% – this after starting 2022 at around 1.50%.

New Zealand has not been immune to the falls, with the NZX 50 down around 5%, while the New Zealand 10-year government bond yield is higher by about 20 basis points, both also as at 21 January.

Can central banks slow inflation?

One of the key mandates for central banks is to keep inflation at or around a target level, usually between 1% and 3%. However, due to the COVID-related supply chain disruptions and labour shortages, the price of many goods and services has shot up, and inflation is well above these target bands. While some of the price rises are idiosyncratic sectors such as used car prices, which should correct as supply chains improve – some are not. These include wages and gasoline prices. Rising wages are weighing on corporate profitability, while rising gasoline prices are hitting consumers at the pump.

One tool that central banks have to address rising inflation is to raise interest rates. By doing this, borrowing money becomes more expensive and this, in theory, helps to slow down investment and consumer spending, which in turn leads to a cooling of prices. This flows through to corporate earnings, which can dampen sentiment and lead to weakness in equity markets.

In the US, market pricing suggests the US Federal Reserve will raise interest rates up to four times in 2022. This is a sharp about-turn in expectations, as less than 12 months ago, the market was pricing in no rate hikes until 2023. And in New Zealand, the Reserve Bank of New Zealand (RBNZ) appears on track to steadily raise the Official Cash Rate (OCR) further, throughout 2022.

Adding to the current uncertainty in markets is that on the morning of 27 January New Zealand time, the US Federal Reserve will meet for the first time this year. While it is expected to leave interest rates unchanged, we could see a shift in tone that will give investors a clearer idea of the path for interest rates in 2022.

Furthermore, investors are closely monitoring the geopolitical situation in Eastern Europe amid fears Russia may be on the verge of invading Ukraine, with reports Russia has up to 100,000 troops at the border. In response, NATO (North Atlantic Treaty Organization) said on Monday it had begun sending military equipment into Ukraine, saying it will continue to “take all necessary measures to protect and defend all Allies, including by reinforcing the eastern part of the Alliance”.

Stay the course and focus on the long-term

While it may be a little unnerving to see the value of your investments decline, it’s important to take a step back and see just how well equity markets and most investment portfolios have performed over the long term.

A key barometer for global equity markets is the S&P 500 in the US, and the past three years, it has delivered annual returns of more than 15%, with two of the three years seeing gains of more than 25%. Furthermore, it’s been nearly 20 years since the index had back-to-back yearly declines. So while instinct might tell you to switch to a ‘safer’ investment option, having patience is usually the best strategy in unsettling times.

In March 2020, when share markets fell on the back of COVID-19 concerns, we saw a lot of investors switch out of growth-oriented funds into more conservative ones. It meant that many missed out on the rebound in markets that followed.

The moral of the story is to stay the course. It’s hard to predict when markets will change direction, and trying to pick the best times to change funds comes with risk.

You’re in good hands

You may feel anxious watching the value of your investments decline, but rest assured you’re in good hands.

At ANZ Investments, we have a team of over 20 investment professionals here in New Zealand, and it means we’re always looking out for your investments – we don’t just take a ‘set and forget’ approach, we actively manage your investments. This means, our investment specialists take a more hands‑on approach to investing and this, alongside having well-diversified strategies, allows us to capitalise on opportunities and smooth out any bumps during periods of uncertainty.

A final word

Market falls are part and parcel of investing, so it’s best to focus on what you can control. The headlines can be full of doom and gloom, and markets can remain turbulent for some time.

However, we believe maintaining a good investment discipline and staying focused on long-term goals is more important than ever.

Disclaimer: This information is issued by ANZ Bank New Zealand Limited (ANZ). The information is current as at 25 January 2022, and is subject to change. This material is for information purposes only. We recommend seeking financial advice about your situation and goals before getting a financial product. To talk to one of our team at ANZ, please call 0800 500 588, or for more information about ANZ’s financial advice service or to view our financial advice provider disclosure statement see anz.co.nz/fapdisclosure. Although all the information in this document is obtained in good faith from sources believed to be reliable, no representation of warranty, express or implied is made as to its accuracy or completeness. To the extent permitted by law ANZ does not accept any responsibility or liability arising from your use of this information. Past performance is not indicative of future performance. The actual performance any given investor realises will depend on many things, is not guaranteed and may be negative as well as positive.