As we move into Autumn 2022, the Financial Markets look to be as unpredictable as the weather. We will take the opportunity to explore the reasons for this in our article – ‘Market Update – A rocky start to 2022’.
It is our hope that you have settled in to 2022 and the relaxations around Covid19 restrictions have allowed you to enjoy some time with family and friends. In this issue of ‘Parc Perspectives’ we will look into current world events and issues that are impacting the Financial landscape.
In this Issue:
- The Ukrainian Crisis
- Market Update – A Rocky Start to 2022
- Inflation – Is Not a Dirty Word
The Ukrainian Crisis
The situation in Ukraine has the whole world collectively holding their breath. Our immediate thoughts go out to the people who are directly affected by the violence and destruction. As concerning as the geopolitical instability and impact to the financial markets may be, these concerns shouldn’t overshadow the humanitarian crisis that the people of Ukraine are facing at this time. The actions of the Russian Military that commenced on February 21st, and are continuing, have violated the sovereignty and independence of Ukraine.
The impact of the sanctions imposed on Russia by EU member states, the U.S., U.K and many other countries will limit Russia’s ability to raise funds to support its military operations going forward. However, level of impact and time horizon for this to take affect remains unknown.
Ukraine has a sizable agricultural export trade that will be affected by the current situation. Interruption to this trade could have worldwide ramification including increasing the price of food, oil, and natural gas. We will continue to provide updates on this situation and monitor effects on the Financial Markets and impacts on our clients’ portfolios.
Market Update – A Rocky Start to 2022
After two years of largely uninterrupted price gains in markets, January 2022 provided a rude awakening for many investors, as equity markets around the world fell victim to fear of the unknown. It wasn’t just the forever loss making technology stocks that bore the brunt of the falls, many high-quality businesses saw their share prices also fall.
Speculation in the press and financial markets pushed many investors into fear mode as we speculated what a persistent elevated inflation number would mean for markets (headline CPI posted the largest year-over-year increase in December since 1982) combined with rumours that this could lead to softening economic growth, and a realisation that the US Federal Reserve, was likely to continue its Quantitative Tapering (i.e., No longer printing money) and start raising interest rates.
With the amount of fear mongering in the press it is easy to overlook the big picture long term investment proposition offered by investing in the stock market because of the short-term headline grabbing news.
Firstly, let’s remember that equity markets have risen on average 18.4% p.a. over the last 3 years, let’s also remember that the market rose an average of 6.1% p.a. over the prior 25 years!
So, whilst it is difficult to exactly predict market movements into the future one thing is clear, all investors in the equity market have been better off being invested than not being invested. Whilst increased volatility can at times cause concern and worry, over the long term the returns always out way the temporary market falls.
Inflation – Is Not a Dirty Word
Inflation can often be the sign of a strong economy.
One thing that is often overlooked when we talk about inflation is that it is a sign of a strong and growing economy. Prices rise because of strong demand, and this means companies can instigate price increases which in turn increase margins and profits. So, whilst that is a very simplistic way of looking at inflation let’s see if we can find an example to prove it. Company dividends are often a good way to investigate the profits of companies and the confidence of management and boards around the world. Again, lets exclude companies like much of the technology sector around the world that has seen massive price appreciation despite never being able to make a profit, clearly those companies do not pay dividends. But if we look at the developed market and compare the profitable dividend paying companies, we see an interesting trend.
In 2021 listed companies including Australian companies paid out approximately $400 billion USD in dividends. In Australia dividends grew by 68% from 2020 (albeit from reduced levels due to concern over COVID-19), in the UK dividends grew by almost 50%. But also, let’s remember that the increasing level of dividends is still below the amount paid pre 2019 when companies cut dividends as the COVID-19 pandemic swept the globe, rather paying down debt unsure what the outcome of the pandemic would be, this has led to many financially robust companies with reduced debt levels and increased profits now paying dividends again.
Whilst the recent market volatility has been worrying for many investors, remember that investing in good well managed companies, with good or often dominant market positions over the long term will more often than not generate positive returns. The volatility may make the ride a little bumpier, but the returns and the dividends are worth the patience.
If you have any questions about any of the topics in this newsletter or would like to discuss anything further, please contact our office on 03 9527 1600.
Parc Wealth Management is a Corporate Authorised Representative of Parc Wealth Group Pty Ltd ABN 24 652 326 915 | AFSL 535090
Any information in this article is general advice only and does not constitute personal or product advice. This information has been provided by Parc Wealth Management Pty Ltd and does not take into account your objectives, financial situation or needs. You should consider whether the information contained within this information is appropriate for you. Where we refer to a financial product, you should obtain the relevant Product Disclosure Statement or offer document and consider it before making any decision about whether to acquire the product.
