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Newsletter 38

10 May 2022

Market Correction

Even though we recently sent out a newsletter, we thought it critical given the further correction in all markets to communicate once again. It is important to understand that when changes to the global economic environment come into play, no asset class is protected. This is currently the case.

As the last newsletter outlined, the world is entering a new economic climate after 30 years of falling interest rates fuelling increases in all asset prices, e.g., property, bonds, equities, private equity, venture capital, etc. We have also seen the new products, e.g., crypto-currencies evolve although we have never been convinced of their merit as an asset class. We note that Bitcoin has fallen over 50% since November 2021. The recent increases and forecast rise in interest rates is driving the prices of all these asset classes down. Adding to the uncertainty is the inflationary and geo-political problems caused by the breakdown in supply chains because of Covid and Ukraine war. 

The table below shows the Year to Date corrections:

*Over the last 12 months. Information on Australian residential property takes at least 6 months to flow through into available statistics, so this figure does not reflect what’s happening in the market.

**As at 30 April 2022.

Some of the volatility is caused by algorithmic trading models. These are computer-based trading models that hedge funds and Commodities Trading Advisers (CTAs) use. The models have buy/sell signals based on pre-determined factors and when one model signals a sell, another may signal a buy, etc. where they trade on very thin movements in the price of an index/commodity/currency, etc. They are complex so it is important to understand the role they play in the market.

This is not the time to panic! We are confident that the steps we have taken over several years, including selling out of international and Australian bonds which were negatively yielding. For new clients that held hedge funds, private equity and venture capital funds we sold out and we avoided them for existing clients. We instead invested in store value assets, e.g., miners and diversifying portfolios has been the correct step. We did this because we saw a stagflation coming and the need to protect capital as far as possible.

In time markets bottom and the unrealised losses are clawed back when the economy turns. Buying opportunities will present themselves, so when they do arise it will be time to act reasonably quickly. Everyone always wants to pick the bottom of the market; however, this is rare and visible only in hindsight. It is for this reason that time in the market is better than trying to time the market.

We continue to monitor the global economic environment and geo-political developments closely. We do have some views about which sectors that will provide new opportunities once markets start to stabilise. We will be outlining these in the future and of course available to discuss.

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