Market roundup: Climbing inflation and the elusive COVID ‘bounce-back’ Market roundup: Climbing inflation and the elusive COVID ‘bounce-back’

For our first roundup, we’re joined by Scott Phillips, The Motley Fool’s Chief Investment Officer in Australia, and Brendan Doggett, Sharesies’ Australia Country Manager.

What’s been happening in the Australian share market?

Scott Phillips (Motley Fool AU)

The Australian share market is having a torrid bout of volatility in recent weeks. Concerns about global factors—inflation, interest rates, and geopolitical tensions (namely Ukraine)—are weighing on share prices as investors try to work out what the impact will be on both company profits and the price people will be willing to pay for shares (higher interest rates should lead to lower asset prices, all things being equal).

The S&P/ASX All Technology Index fell more than 26% between late November 2021 and late January 2022. Investors seem concerned that those fast-growing, but unprofitable, companies whose profits are still years away will be most impacted by rising prices and interest rates. The energy sector has gone up strongly thanks to rising oil prices (see: Ukraine, above). And befitting its relatively boring nature, the utility sector has been pretty steady, avoiding most of the broader market pain.

Brendan Doggett (Sharesies)

The Australian Securities Exchange (ASX) has had a bit of a rocky start to the year, driven by: 

• COVID-19 continuing, including the emergence of the Omicron strain

• concern over inflation, which can make goods more expensive and increase costs for companies, and

• rising interest rates, as central banks look to tackle inflation which can also increase costs for companies.

This has had a flow-on effect on how investors have reacted. Some are getting nervous and selling their shares, while others are looking at how this might be an opportunity to “buy the dip.” We can see this reflected in how different company share prices are performing.

What’s been happening in international share markets?

Scott Phillips (Motley Fool AU)

Unsurprisingly, given the events impacting the ASX are global in nature, share markets around the world are experiencing similar jitters. The US had an inflation rate of 7% during January 2022, and late in the month, New Zealand announced its highest rate of price growth in more than three decades. That’s leading to market fears of sharp and sudden action by central banks around the world, with unknown consequences—unsurprising given how long it’s been since we saw inflation of this magnitude anywhere in the developed world.

Old stalwarts like Berkshire Hathaway (I own shares, for the record) delivered a better one-year performance than the likes of Apple and Tesla. Whether that continues, as investors fret over inflation, or things go back to pre-inflation normal, is continuing to keep investors on their toes.

On top of that, the International Monetary Fund (IMF) has recently cut its forecast for economic growth this year to 4.4%, down 0.5% from its previous forecasts. This underpins questions of how 2022 might unfold economically, and hurt sentiment, at least with so much other uncertainty around—and the world struggling to make its way out of the latest COVID wave.

Brendan Doggett (Sharesies)

Inflation hit a 30-year high in NZ, and economists are expecting rates to increase across 2022 to combat this. The US Fed’s decision in late January on interest rates was a key driver of the recent market dip. The US, and how it responds to inflation, will likely continue to impact the markets globally across the year.

We’ve also seen certain industries hit harder by this market volatility than others. Tech stocks declined, as fast-growth stocks often do during market dips. On the flip side, there’s promise for other industries, like travel, as the world continues to progress toward reopening, and increased movement globally.

“Earnings season” (companies reporting on how they performed) is underway in the US and Australia, with some NZ companies due to report in February. We’ll likely continue to see movement in the markets off the back of this. 

Are there any key themes or trends you’re seeing?

Scott Phillips (Motley Fool AU)

One of the biggest challenges for investors right now is trying to work out what impact COVID has had (for good or ill) on the results of listed companies. We haven’t had a “clean” (sans-COVID) year of earnings since the 2019 financial year, and we’re now in the home stretch of 2022 for most companies.

No one doubts that the pandemic has significantly hurt tourism, hospitality, physical retail, and entertainment companies, but it’s hard to know how much, and what the bounce-back might look like.

Online retail and video-conferencing companies, to name two areas, have done very well during COVID, but it’s hard to know how much of that growth they’ll keep thanks to changed habits, and how much revenue will flow back to more traditional channels once life returns to some sort of normality.

The other COVID impact is supply chain and related costs, with sea freight prices still double pre-pandemic levels, and airfreight capacity limited by the lack of passenger flights within and between countries. Add in the impact of costs for testing, staffing and other ancillary costs, and the profit and loss statements of listed companies have perhaps not looked more opaque for at least a couple of decades.

Brendan Doggett (Sharesies)

All of these market influences aren’t going to go away overnight. Investors might want to take a look at their investment strategies and goals and think about how they can hold true to them even during periods of market uncertainty.

If you are thinking longer-term and going after “time in the market, not timing the market”, then don’t let short term ups and downs derail you from your broader goals.

What’s been great to see is that Sharesies investors have largely stayed committed to their long-term goals and continued to buy and sell as per usual.

Wrapping up 🎬

That’s all for this month’s market roundup! If you’re curious for more on the current state of the share markets, you can read about why the markets have taken a dip recently. Or, check out Brendan’s five investing themes to look out for in 2022.