Important Investment Update

As a result of geopolitical tensions (Russia/Ukraine) and affects related to the global pandemic, among other factors, financial markets across the world are experiencing a return to volatility. We write to provide you with context to help you understand what this may mean to your invested funds.

Recent History

Since the bottom of the most recent drawdown of significance in March 2020, global markets have seen substantial increases in asset prices. It is fair to say that the this increase was not anticipated by many to be anywhere near as strong as has occurred. This being the case, it is not unreasonable to expect what we are now witnessing in asset price adjustments lower. It may be that prices moved too high, too swiftly previously.

The catalysts for the swift move higher in asset prices was a composite of several factors, including:

  1. Federal reserve banks across the developed world maintaining and even increasing their quantitative easing initiatives. Effectively, this ‘money printing’ activity injected funds into an economy and stimulated economic growth.
  2. Pent-up consumer expenditures. With people being largely stuck at home for seemingly indeterminate periods of lockdown, more time was spent online consuming content and participating in ‘retail therapies’. This resulted in the big tech and allied sector industries burgeoning their retail sales.
  3. Government initiatives to support business and employment. Just as federal reserve banks were printing money, so too were governments increasing handouts to business and individuals to keep the economy and employment going.

These actions appear to have had something of the desired affect to stimulate economic activity and drive fuller employment. There is however, a sting in the tail – inflation. With rising cash flow and increasing consumer demand, supply chains of goods have been stretched. Even though consumers have been prepared to spend, as most goods in the developed world are supplied by the underdeveloped world and China, pandemic affects in these nations have meant the supply of goods has been delayed. In short, we have witnessed increased demand over a constrained supply – and as night follows day, price stretch has occurred.

What can be expected now?

We have witnessed events such as these in the past and can take note of the observations from these.

News flow

  1. Just as we saw with the announcement of the onset of the pandemic in Jan/Feb 2020, markets reacted swiftly to take in the news and rapidly declined. The responses of leaders was to undertake stimulatory actions as detailed above.
  2. Election of certain officials to public office. Short, sharp volatility events often align with the election of presidents, prime ministers, etc. How these are perceived in response to their policies for business and social welfare, etc often move markets – temporarily.
  3. Geopolitical issues, such as the announcement of Brexit several years ago had an immediate impact upon asset pricing, notwithstanding the application of exit protocols was still a few years away.
  4. Many of varying degrees over many years have had effects upon markets however the passage of time has seen these moderate and markets recover.

The chart below illustrates global share markets performance for the period since June, 2008, part way through the very significant drawdown associated with the global financial crisis.

 

 

 

 

 

 

 

Source: investing.com  VT ETF

The chart illustrates a substantial recovery and importantly, the very sharp rise late in the period commencing March 2020. As stated earlier, it is not unreasonable to expect this latest drawdown given how strong the recovery from the pandemic announcement has been.

We do not anticipate this latest drawdown to be the commencement of an event like the global financial crisis of 2008/2009.

We maintain the view that your investment portfolio/s managed by IndexInvest, our wholly owned investment management firm, is/are well positioned with diversified exposure to high quality investment assets. Investment holdings are monitored daily.

As in the past, particularly as demonstrated by the decline in February/March 2020, maintaining current positions is the most suitable course to follow at this time. Should this view change we will be in further contact with you. As always, please contact us should you wish to discuss this further.

Yours sincerely,

Your Team at Holzworth Partners

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