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Turns out – does the high level of pessimism, the high balance of payments and the size of the market depressed mean that we are nearing the end of this year’s volatility?

This article was written by Devon’s Head of Retail, Greg Smith.

Friday, July 1st 2022, 12:41 PM

and Devon Funds

Everywhere you look you can see messages about economic crisis and darkness. Prices of food, petrol and many other commodities continue to rise, putting pressure on shopping bags. Housing prices are falling across the country, adding more salt to the wounds of rising mortgages, giving people coming (or going) next year. low low hold.

Nowadays, a lot of speakers and economists (almost happy in some cases) raise the profile of the kiwi economy. There’s unemployment, customers are doing well, and boundaries are opening, but in business, things are a lot harder. That said it’s time to end the barriers (outside of the government, which has continued to splurge heavily).

Then there is the stock market. Emotic headlines are always the main idea so it’s no surprise that when kiwi pieces entered a ‘bear market’ (falling 20% ​​from last year’s peak) they didn’t in time, it captured a lot of media attention. The NZX50 has rallied in recent weeks, but is moving around the ‘bear market’ country, declining from a January 2021 high of around 20%. It was the first half of the year though. The NZX50 lost 3.8% for the month of June and is about 16% lower in the first six months of 2022.

We are not alone.

In fact, U.S. markets are more complex. The Nasdaq has held the technology down 30% year -over -year to date, while the S & P500 is wide the first half of the year since 1970. Volatility is the highest since 1932, around the time of the Great Depression. The fixed market was even worse, recording its weakest start in the year since 1788!

Maybe an idea is needed.

This year was also a time when markets around the world were again buying into the high levels of inflation and the stagnation of interest rates that came with it. After non-invasive stages during illness, the “punch-bowl” should be removed. The piper must be paid. The war in Ukraine has greatly exacerbated concerns about the inflationary problems the world is facing.

The pace of the market downturn is accelerating, as investors have quickly come to the conclusion that inflation will stay with us for some time, and that the end result will be the end result. With prices getting much better, so this begs itself to the question – what if the bear -case trend is avoided?

The chart below shows the performance of the S & P500 in the US since the 1950s when the index returned 20% on the return (light blue line), and when it did not (dark blue line). ). Not surprisingly, when the crossing was avoided, the market worked hard on the side.

It remains to be seen if we will have a recession now, but history has shown that in recent times the markets are facing price errors. This can create more opportunities for economic decision -making (such as those used by Devon). In addition, there are some professions and pieces that can work well, even in the event of a fall.

The effects of inflation are key. Think of the past year when growth was seen as ‘transitory.’ Central banks were distracted by the belief that inflation was set to continue for a long period of time. The issue was then well calmed down by the situation in Ukraine which saw prices for the masses of goods go up.

The labor market is raising wages, which gave rise to expectations of the 1970s wage rate. A significant difference is that the last 50 years have seen the end of inflation. the supply side (and the oil vibration). All this time, even though the equipment on the demand side has been depleted, the world is reopening after Covid.

Markets are prone to expansionary pressures, which usually come out sooner than expected than never before. Simple mathematics, however, tells us that we are about to end up with all the known age numbers. The problem is that inflation is starting to soften, the responses of the central bank may change, and we see a much more balanced probability of having different industries. .

Growth has been soft in some areas. The cost of shipping during illness is a hot topic with this increase due to the tightening of the chains, and the result given to consumers. As the chart below shows, these are significantly reduced from their highs when the complex began. While the high prices of many commodities are associated with war (an unknown time), there is reason to believe that global warming will continue to expire from the expansion of foreign lands. yes.

When it comes to deductibles among global businesses, New Zealand has a big problem, given the size of our short -term mortgage debt. Retail prices are an example during a period of illness amid low mortgage rates. While there has already been a recovery, NZ housing prices have fallen sharply (a recent Bloomberg Economic report told our market that it was the hardest hit at the root of the problem). buy to earn money and earnings).

Falling housing prices have had an economic impact on consumer spending, and are being exacerbated by rising living costs and higher credit costs in the future. and people from short -term mortgages. This is a direct flow to the industry, with consumer spending at about 70% of GDP. The rest of the world is very skeptical.

It’s coming back to the markets but a lot of bad news has been sold. However, the relationship between the PE of the NZX50 and the actual yields is very strong on the 10 -year government bonds. At current prices, the expected P/E (price to earnings ratio), based on this historical price for NZX50, is around 18.9x. Currently at 17.3x, all the variables indicate that equities are supported by their valuation.

The last big question right now is what the future holds for earnings – the ‘E’ in P/E. History has shown that it is about making money when the central banks are closed and the business is slow. To illustrate this relationship, the chart below shows the relationship between monetary policy and earnings on Australia’s ASX. This should drive the markets over the next six months.

An important question is how long the central bank will be stable. We know that most central banks are determined to keep their interest rates as low as possible. At the same time officials don’t want to send jobs into a tailspin. Fed Chair Jerome Powell now said the Fed could make a positive change in the nature of the economy. The RBNZ does not use this term, but where the Fed goes will follow others.

Either way it can be expected to continue the bonding process for a shorter period of time than the market price – either because of an economic downturn, or because of a slowdown in inflation. faster than expected.

History has also shown that when the central bank begins the bonding process, the bond is more stable over the long term. This is important because of the debt in the system. We hear a lot about the problems with high debt levels here and in other parts of the world. While these concerns are certainly relevant, it should be noted that in recent years home maintenance costs have increased as a result of the impact on people by Covid and related policies. So the economy is not as simple as the heads think.

Back to the markets, focusing now on the topic of money. This is very high from the point of view of investors. A Bank of America study showed the highest level of long -term executives ’money since 2001. So most investors are positioned for the volatility we are seeing.

The highest level of money saved since 9/11!

The purpose of this review is to show that there are only so many sales that can be made by investors. Nor have executives of this underweight been in the fair market since April 2020 when Covid hit big. Pessimism is high, but markets are turning to bearish (and bullish) highs.

Is the roadway close by?

Time will tell, but “big work” has already been done on the downside in response to inflation and economic weaknesses, in the form of these factors being sold to the market. Such an environment is invaluable for potential investors choosing archives and parcels. Less so for passive people.

In Devon our currency has managed well against this year’s volatility. We are committed to our auditing and focus on high, ‘real’ professionals. We are happy to pay for growth, but only at the ‘right’ price. This has supported a market -related investment activity among our currencies.

Continuing to see comparisons, see our Devon Alpha Fund move from about 25% money a month or half every now and then. While market volatility will continue in the coming months, the opportunity is improving for investors. Not all canoes could be lifted when the tide rose.

Devon Funds Management is an independent financial services company that accelerates the building of investment funds for its clients. Devon was founded in March 2010 following the acquisition of the financial services business by Goldman Sachs JBBere NZ Limited. Devon employs a real estate model, with an emphasis on investment. Devon operates six stock exchanges covering the entire world of New Zealand and Australian equities and has also launched two new global investments with an ESG focus. For more information please visit www.devonfunds.co.nz

Words: Devon FM

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Turns out – does the high level of pessimism, the high balance of payments and the size of the market depressed mean that we are nearing the end of this year’s volatility?

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