This year is shaping up as one of the worst on record for investors as central banks struggle to bring inflation under control, the growing likelihood of a recession in the US, United Kingdom and the Eurozone, and fears that the war in Europe could escalate.
“Over the past year, the global inflation spike has weighed on market sentiment, contributing to a broad-based sell-off across many asset classes, with only a small number generating positive returns,” says Damien Hennessy, head of asset allocation with Zenith Investment Partners.
Almost all investment classes are likely to finish this year in the red – one of the worst years on record for investors.Credit:Louise Kennerley
Similarly, David Bassanese, chief economist at exchange-traded fund (ETF) provider BetaShares, says the breadth of the weakness across asset classes makes this year “one of the worst” on record for investors. Even those investments that usually perform well in times of high inflation, such as bonds and gold, have failed to provide protection this time, Bassanese says.
Superannuation funds have produced a return of negative 8.1 per cent since the start of this year. The Australian sharemarket is down almost 9 per cent and overseas sharemarkets are down about 20 per cent.
Australian property prices are down – which will be welcomed by those looking to buy their first home – though it is not all bad news for property investors with rents rising strongly.
Younger investors, many of whom only started investing during COVID-19, have taken a bigger hit than investors with better diversification as the US tech shares and cryptocurrencies they favour have taken a thumping.
The tech-heavy US NASDAQ 100 sharemarket index, which includes the “FAANG” stocks – Meta (Facebook), Amazon, Apple, Netflix and Alphabet (owner of Google) – is down 20 per cent in Australian dollar terms since the start of this year. Over the same period, Bitcoin is down about 50 per cent in Australian dollars.
The energy sector of the Australian sharemarket, whose constituent companies have done well from higher oil and gas prices, is the stand-out, producing a “total” return, which includes dividends, of almost 47 per cent.
It is a battle between central banks – particularly the US Federal Reserve – and inflation which is crucial to what will happen in investment markets. Rising inflation after COVID-19 was inevitable as governments around the world spent during the worst of the pandemic to keep their economies afloat.
As lockdowns ended and borders re-opened, demand for goods and services increased. But then came Russia’s invasion of Ukraine which saw energy prices and food prices soar, adding to inflationary pressures that were already building.
The results of these events continue to fuel high inflation, a slower growth outlook and elevated uncertainty, says Alan Oster, the chief economist at NAB Group.
“We see global growth slowing to well below trend rates over each of the next two years, and significant slowdowns, if not recessions in a number of advanced economies including the US and the United Kingdom as inflation and rate rises impact consumers,” he says.
Thomas Dobler, senior portfolio manager of multi-asset at Acadian Asset Management, says the question for investors is whether central banks can bring inflation under control before they induce too much of a hit to economic growth through higher interest rates.
The performance of shares is crucial to the returns of superannuation balanced options, which usually have more than half of the money invested in shares, with the remainder spread between other asset classes.
BetaShares’ Bassanese says it will likely be the second half of next year before sharemarkets improve. He says if inflation is brought under control earlier, fears of recession in the US will recede and sharemarkets will “bottom” sooner.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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