From an investment viewpoint, 2021 ended off well. There was a new mood of optimism as it became clear that the Omicron variant of Covid 19 was going to have less of an impact health-wise than its predecessors had done. Economies were opening up again and travel restrictions diminishing in many instances.
As 2022 begun, the optimistic mood surrounding Covid remained despite the huge number of Omicron cases in Europe, the US and elsewhere. Notwithstanding the high case load, hospitalisations and deaths remain comparatively low and, so far, manageable. This trend is likely to continue and, in the absence of a new, more deadly variant, together with the ever- expanding vaccine roll out, the pandemic which has affected the world so significantly over the last two years could well be in definite retreat come mid-year. Whatever happens the world is now learning to live with the virus.
It seems, though, that so far in 2022 investment markets are not sharing the optimistic mood. The one exception is our own JSE All Share which is up nearly 3% for the year at the time of writing. Not to be outdone, the Rand has strengthened against the USD by nearly 4% since the start of the year. The positive return on the JSE reflects a better outlook in global emerging markets.
There has not been the same enthusiasm in developed markets which are down just over 3.5% for the year so far. Clearly there are concerns mainly around the prospect for higher inflation and with it rising interest rates. Tapering of the financial stimulus and a resulting decrease in liquidity in the US is also having an effect.
Whilst the gradual normalising of interest rates, from their recent historic lows, is quite normal and to be welcomed, anything more aggressive, particularly to ward off dramatically rising inflation, might have the effect of stunting the global post pandemic recovery.
This then is the key – gradual interest hikes over time versus aggressive rate increases in the short term. Which will it be? It is obviously a concern, hence the negative start to the year for developed markets in particular.
There are also some geo-political concerns – Ukraine in particular but also Iran, the Arabian peninsular and perhaps, later, Taiwan. However, barring major catastrophes, markets do tend to discount these threats quite quickly. The economic ones are more significant.
Although a more buoyant mood is still present, the headwind duo of inflation and higher interest rates is a major concern. The remnants of Omicron with resultant pent up demand affecting inflation as well as supply chains, which still haven’t returned to normal, are on-going concerns. As a consequence, 2022 could well be a year of lower investment returns even if emerging markets continue to prosper.
We firmly believe that investment diversification is as important now as ever it was. Well managed portfolios, such as those we offer with our partner, Morningstar, remain ideal investment vehicles – whether they be used as retirement funding plans, annuities in retirement or just for medium-term savings and capital creation.
Please contact your Maximus adviser if you want to discuss this further.