We thought it timely to add some internal Peak Investment Committee commentary around the Wealth Market Update for the June 2022 quarter. Our Investment Committee meets monthly to receive written and verbal updates from fund managers that make up our investment portfolios.

Firstly, it's important to put some context around the challenging start to the 2022 calendar year.

We have experienced quite healthy investing conditions over the past decade, characterised by a gradual decline in interest rates and robust global markets. Therefore, a natural pull-back and re-calibration in market pricing of assets is something we (as investors) need to expect from time to time. That said, we completely understand the natural human feelings of anxiety and concern that are often felt when you see valuations decline and challenging market conditions.

During periods of low inflation, like those experienced in the past decade, fiscal (Federal Budget deficits) and monetary policy (interest rate) settings supported an expansionary bias to the economy. These conditions inevitably led to pockets of over-exuberance and in this regard, this had been highly concentrated in the high growth end of financial markets (technology, biotechnology, buy now/pay later stocks, crypto markets etc). Property valuations also benefited greatly from these conditions.

Focusing on the share market, high growth sectors were starting to look as if their values had increased well beyond their worth (intrinsic value) prior to the COVID outbreak in March 2020, BUT then COVID struck the global economy. The stay-at-home dynamic and heavy financial stimulus that followed accelerated the growth that had been pushing up valuations in these exciting, high growth sectors. Investors were willing to pay an extravagant amount for any given level of earnings for companies that had very strong Growth potential long-term. Valuations expanded significantly more as a result, until some sense of reality started to creep into markets this time last year.

The pure “Growth” category of the United States of America share market (S&P 500 Pure Growth Index) has fallen by approximately 30% since the beginning of 2022, whilst the S&P Value Index (an index of more stable, albeit slower growing businesses) is only down approximately 8%. The US S&P 500 index as a whole (the broad-based US market), is currently down approximately 20% and global markets (including Australian) have also pulled back substantially over the past few months. The heat has definitely come out of the market thus far this year and the June quarter Wealth Market Update summarises a lot of the key contributing factors at play here.

Diversification, strategy and time horizon

We construct our portfolios to match your (our clients') objectives and risk tolerance. We like to think of this as a purpose-driven investment philosophy!

Diversification plays a major role in this regard, across different asset classes AND different investment styles. Whilst the portfolios we manage (priced on a daily basis) are naturally feeling the impact of the declines in values being felt broadly across global markets, the diversification certainly smooths out the investment ride considerably!

We have been maintaining a “value/quality” tilt to our portfolios and whilst this has benefited greatly over the past 12 months, our higher weighting to the mid to small cap area in Australian shares, at the expense of the largest 20 stocks by size on the ASX, has detracted from performance over the past six months. We maintain this overweight as this area of the market provides far greater sector diversity and we feel this will bounce back very well as and when market interest rate expectations start to pull back and we enter a recovery cycle.

Likewise, with bond rates having increased substantially over the past six months, the defensive area of the portfolios (bonds etc.) have provided little benefit recently – however, with higher yields, should start offering a much better return outcome going forward.

Strategy plays a major role in navigating challenging market conditions AND this can only work by having a clear ongoing picture of your unique, personal situation. Understanding your cash flow needs and when you may need to call upon lump sum amounts for living/lifestyle needs is critical. We have been cautious in deploying additional client cash reserves over the past 12 months and have communicated the benefits of maintaining “ammunition to invest” so to speak. Dollar cost averaging into markets in these conditions can be a fantastic strategy and history shows that investing when others are fearful, is often the point of maximum longer-term opportunity.

It is interesting to note that Warren Buffett’s (perhaps the most famous value investor of all time) Berkshire Hathaway has deployed more than US$40 billion in additional investments over the past 3 to 4 months. Buffett would be the first to admit that picking a market bottom is impossible, but after building up a cash war chest it is nice to see Berkshire putting this capital to work now, to reap the benefits longer-term.

Finally, we continue to implore you to maintain appropriate time horizons with your investments. The more growth-oriented part of your portfolio is and always should be, a long-term strategy. A good way to manage the emotions that arise in volatile conditions is to think of your growth assets as lifetime holdings. Your defensive assets can be used to draw down from in the short to medium-term (if needed), along with the higher income generated from your growth assets.

Therefore, we suggest you spare yourself the anxiety that is often associated with the gyrations in markets. We know this is easier said than done and we are always here for you, but focusing too much on the short-term noise, tends to cost you in the long run.

What’s in store for the remainder of 2022?

The combination of COVID and the conflict in Ukraine has resulted in a significant global supply chain shock and, with robust end demand through to the end of March this year (assisted by stimulus cheques, strong employment and business conditions), we are experiencing material inflation for the very first time in many years.

Financial conditions have tightened considerably over the past few months though (with accelerated interest rate increases and strength in the US dollar), and a lot of leading economic indicators are signalling for a strong slowdown in global economic conditions over the second half of this year. This is a necessary evil to fight inflation however a recessionary environment will likely impact employment and corporate earnings in the short-term.

The good news is that the market is a forward-looking mechanism AND a lot of this anticipated slowdown is already priced into asset values in global bond and share markets. Interest rates may not increase as much as the market has been anticipating AND a gradual opening up of supply chain channels would also be highly beneficial in this regard (and for the global economy in general). This would naturally dampen inflationary conditions without the need to kill off end demand via excessive interest rate rises to do so.

Nonetheless, it is likely we will have to put up with volatile markets in the near-term (no big surprise here I know), AND there may yet be more downside to come before we can ride the recovery cycle back up again.

Therefore, we ask you to stay the course and focus on your strategy and overall financial plan. One thing we all know is that markets never go up in a straight line, BUT we will continue to work with you to navigate the conditions appropriately.

If you are feeling anxious or concerned about market conditions though, please don’t hesitate to call your dedicated financial adviser at The Peak Partnership, Pat Kelly or Jenny Kitching.

You can also read more about the current economic and investment landscape in our latest Wealth Market Update.