John Berry is co-founder and chief executive officer of ethical fund manager and KiwiSaver provider Pathfinder Asset Management.
OPINION: New Zealand’s sharemarket continues to be dragged up and down by global trends.
Being well under 1% of total world markets, we’re often at the mercy of what international investors are thinking.
With four months to go in 2022, anything is possible. Markets could track up reasonably strongly, drift largely sideways or head down.
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Let’s look at the likelihood of each and what’s driving markets.
Starting with the good news, “peak inflation” globally should be reached shortly and many supply chain challenges are being fixed. Helpfully, global shipping costs are trending down.
The US, the world’s largest economy, has plenty in the way of good news.
Two out of every three large US listed companies (those in the S&P500 index) are reporting earnings above expectations. Borrowing ratios for US companies are relatively low and bank capital levels are well above minimum requirements.
This implies resilience in the financial system. But it’s not all good news. Housing markets drifting lower globally are sapping consumer confidence. Supply chain challenges are mending in part because lower economic activity means less demand for goods.
And there are broader risks with conflict in Ukraine, Europe’s energy supply issues and unrest in China around mortgage payments.
More than 60 countries have lifted interest rates so far. Borrowers with marginal cashflow will be hurt by higher rates and tighter lending rules.
Making sense of this is hard, but our expectation is we’re looking at a shallow recession. History tells us, and this intuitively makes sense, that you typically don’t have a deep recession when unemployment is low. Unemployment is equal to its 50-year low in the US.
A look at over 20 strategists sees them split pretty evenly between US shares going higher, staying flat or tracking lower over the rest of the year.
Those seeing higher markets have an average expectation of 13% higher. Those expecting the market to drift come out with an average expectation of 4% higher. Those seeing it weaker for the rest of the year have an average fall of 9%.
Clearly, they can’t all be right. There’s no certainty, but without any significant global economic shock, we see the falling market scenario as the least likely outcome (the average fall of 9%).
We see the most likely as a drift slightly higher over the rest of the year, with the 4% average strategist forecast. We’d say that outcome is twice as likely as a down market.
What is clear is that we cannot look at the recent bounce in sharemarkets – the US is up 12% over the past two months – and expect that to repeat every two months for the remainder of the year.
Rather than a short-term focus, longer-term trends provide more certainty for investors. For multiple years ahead, wind energy generation is expected to increase by 13% a year, digital health data by 36% and electric vehicles by 45%.
Investors should look for longer-term opportunities in each of these themes.
Let’s remember that shares can go up and down, sometimes wildly, and we continue to face plenty of uncertainty around the globe.
However, there are also plenty of reasons to stay cautiously optimistic. I’m thinking it’s more likely that sharemarkets are flat or up rather than down over the rest of 2022 – but sorry, there are no guarantees.
This commentary is general information only. It is always a good idea to seek professional financial advice for your personal circumstances.