The share market remains resilient
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- By Ken Howard
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- Date posted:
- 14 March 2022, 9:30 AM
You cannot eliminate the economic cycle, nor the impacts of inflation or taxation, but you can structure a strategy around your goals and objectives, your resources and time frame, and have a reasonable prospect of achieving a realistic outcome.
You don’t need to know the future, after all no-one knows the future, but you do need to have a robust, commercial framework for making investment decisions, whether that is; the amount of cash you should hold, the split between property and shares, or even which property and or shares to buy.
I know the current round of ‘problems’ can appear unprecedented; COVID, Russia invading the Ukraine and supply chain disruptions driving inflation, but believe it or not, there have been many similar events in the last 25 years.
| 1997 |
Asian Financial Crisis |
| 1998 |
Russia defaulted on its debt |
| 1999 |
The Y2K bug |
| 2000 |
The Tech Bubble went bang |
| 2001 |
September 11 |
| 2002 |
Start of the Afghanistan war |
| 2003 |
Start of the Iraq war |
| 2004-2007 |
Pre-GFC property and bond market bubbles, where any credit was ‘good’ credit |
| 2008 & 2009 |
The GFC, including the collapse of some of the World’s largest banks |
| 2010, 2011 & 2012 |
European Sovereign debt crisis |
| 2013, 2014 & 2015 |
The Syrian Civil war, Russia invades the Crimea and the Ebola epidemic starts in Africa |
| 2017, 2018 & 2019 |
The Australian apartment construction boom and subsequent collapse, Trump and his multiple decisions, Brexit, unrest in Hong Kong etc |
| 2020 & 2021 |
COVID-19 |
You may ask, what was the impact of these events on Australian investors? Well as can be seen in the chart* below, only the GFC and Covid had any material impact on the profitability of Australia’s leading companies and the dividends paid to shareholders.
The chart also re-enforces the value of having a diversified portfolio of; mature, large cap, dividend paying companies, to any retirement investment strategy. (The dotted line illustrates 5%p.a. growth)
To give the Russian Ukrainian conflict some ‘economic’ perspective, depending on commodity prices, the Russian GDP is about the size of the Australian economy. Around 60% of Russian GDP, in 2019, came from natural resources. Russia is the World’s second largest oil and gas producer and has the World’s largest gas reserves and 8th largest oil reserves. Russia is a top 10 global producer of over a dozen major commodities, including; oil & gas, coal & iron ore, gold & silver, copper, lead & zinc, wheat, oats, barley and sunflower seeds and they have the World’s largest fishing fleet.
The Ukraine economy is about the size of New Zealand economy but with 8 times the population, making Ukraine the poorest country in Europe on a GDP per capita basis. Until recently, Russia was Ukraine’s largest trading partner buying 25% of their exports and supplying 30% of their imports.
To give it a bit more perspective, the EU is about 10 times the size of Russia on a GDP basis, and the USA is about 1.5 times the size of the EU. However, the EU is very reliant on Russia for energy. I would note over 75% of household energy consumption in Europe is for heating and a further 6% is for cooking. Over half of this comes directly from the household, burning oil & gas and a quarter comes from electricity (44% of the electricity generation comes from coal, oil & gas). So in short, close to 60% of a households heating and cooking needs are dependent on coal, oil & gas and somewhere between 30% and 40% of this is being imported from Russia. I would also note that EU domestic production of coal, oil & gas has halved over the last 30 years.
In short, the most material economic impact, on the global economy, will be disruption to trade, particularly commodities and this will only serve to exacerbate an already strained global supply chain, caused by rolling covid lock downs over the last couple of years, and still ongoing in China.
War is inherently uncertain, but if I assume that some form of armistice can be reached in the coming weeks and months, then the biggest issue for investors is likely to be inflation (driven by supply side disruption, record government deficits and record low unemployment) followed by interest rates. I know things can change quickly but global bond rates bottomed over 12 months ago and, in most developed countries, they now exceed the highs of 2019.
Higher interest rates will dampen asset values, but very little in macro-economics is linear, and it is highly unlikely that rising interest rates will have any immediate impact on overall economic activity. Typically interest rate policy takes between 1 and 2 years to have any measurable impact (but it will have an impact).
In the current market I have been recommending that clients top up on a number of core holdings like; Amcor, Transurban, Sonic and Scenter Group, while also using the volatility to add some stronger growth companies such as CSL, Carsales.com and Domino’s pizza.
More Information
Ken Howard is a Private Client Adviser at Morgans. Ken's passion is in supporting and educating clients so they can attain and sustain financial independence.
If you have any questions about your financial plan or your share portfolio, your strategy, investments or would just like to catch up, please do not hesitate to give me a call on 07 3334 4856.
General Advice warning: This article is made without consideration of any specific client’s investment objectives, financial situation or needs. It is recommended that any persons who wish to act upon this report consult with their investment adviser before doing so. Morgans does not accept any liability for the results of any actions taken or not taken on the basis of information in this report, or for any negligent misstatements, errors or omissions.