Mark Lister, July 2022

Many investors will be happy the first half of 2022 is behind us. With the exception of commodities, most asset classes suffered heavy declines.

The S&P 500 in the US fell 20.6 per cent, which is the worst first six months of a calendar year since 1970. Having said that, when a lower NZ dollar is accounted for this becomes a more modest 13.2 per cent fall.

In New Zealand, the NZX 50 declined 16.6 per cent. That’s the worst performance in a six-month period since 2008, when we were smack in the middle of the GFC.

Even conservative assets declined, with New Zealand corporate bonds down 4.3 per cent.

According to Deutsche Bank research, US 10-year Treasury bonds recorded their worst first half since 1788, just before George Washington became President!

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The Real Estate Institute’s house price index for Auckland is down almost 12 per cent in the last six months, while cryptocurrencies have plunged almost 70 per cent so far in 2022.

Rising interest rates have been a key reason for such volatility, as policymakers around the world attempt to withdraw the stimulus of recent years.

That normalisation was always on the cards, but higher than expected inflation has seen investors rapidly rethink expectations for the speed of the process.

At the beginning of the year, financial markets were expecting the Official Cash Rate (OCR) to finish the year at 2.25 per cent. It’s two per cent today and by Christmas it’s expected to be approaching 4.00 per cent.

In the US, we started the year with markets expecting the Fed’s policy rate to finish 2022 at 0.75 per cent. It was already beyond that by early May, and it’s expected to end the year higher than three per cent.

If I had to guess, I’d say there is a more volatility to come. At the same time, I suspect we’re past the worse and I’m not expecting a repeat of the first half during these next six months.

There are early signs of inflation peaking, with commodity prices off their highs, demand softening and indications of supply bottlenecks easing.

That won’t stop the interest rate hikes, mind you. Our Reserve Bank will push through another increase next week, while many other parts of the world are still playing catch-up.

The upcoming earning season will be important for the direction of sharemarkets, and it will help gauge the impact of higher borrowing costs, lower confidence and slowing activity on margins, profitability and dividends.

US companies will begin reporting earnings late next week, starting with the big banks, while August will be a crucial period for the corporate sector across New Zealand and Australia.

The good news, and there definitely is some, is that many asset classes look better value than they have for some time.

US shares ended June a little more than 20 per cent below their January peak. Historically, investing when markets are down as much as this has proved a lucrative strategy.

I looked back at all the months since 1950 the S&P 500 closed more than 20 per cent down from a recent peak. Buying at those times yielded a positive return over the following two years on 89 per cent of occasions, and the average gain was 28.0 per cent.

While some investors will be lamenting their lower Kiwisaver balances and negative returns, those with a long-term perspective should be rubbing their hands, and even hoping for more weakness.