MAS Investor News update - market correction

Global share markets have taken a tumble through the start of 2022. In fact, January saw the worst monthly performance for global shares since March 2020.

In this article with our investment manager, JBWere, we explain what has caused this movement and what this can mean for our investors.

Where have we come from

Firstly, it's worth considering where we have come from. It has been quite an unusual period for share markets up until the end of 2021. Not only have aggressive policy stimuli and notable medical breakthroughs with respect to COVID-19 resulted in strong share market returns over the previous two years, but those returns have been remarkably stable. Before the start of the year, the world's largest share market, the US share market (as measured by the S&P 500 Index) had gone 61 straight weeks without a fall of 6% or more. This is the third longest stretch over the past two decades.

It has been historically quite common for share markets to experience one or two 5-10% corrections a year. Therefore, the weakness and volatility through the start of 2022 could be seen as not only normal, but arguably overdue. The main question was not whether a correction would happen but what would trigger it. 

What has caused the market correction?

Continued fears around record-high levels of inflation and the threat of rapid interest rate rises have spooked investors, which has led to the market weakness we see at the moment. 

High inflation is typically bad news for share markets and investors as increased costs for companies can eat into the bottom line. It also makes it harder to get a 'real' return - one that outpaces the level of inflation. 

What we do know is that inflation is elevated. In the US, annual CPI inflation is currently running at 7.5%, a 40-year high. As a result of the inflationary pressures around the world, central banks and especially the US Federal Reserve Board (Fed) have taken a sharp pivot from relatively accommodating positions. Responding to the growing inflation risks, the Fed have signalled the imminent removal of monetary policy stimulus both earlier and more aggressively than previously expected.

The resulting increases to the expected path for interest rates has sent jitters across financial markets. Interest rates impact share markets in many ways, but they are an important input into the calculation of a company's value. All else being equal, the higher the interest rate (or discount rate), the lower the valuation.

In New Zealand, the Reserve Bank raised its official cash rate (OCR) by 0.25% to 0.75% in November last year. It was the second consecutive increase, after a 0.25% increase in October 2021 - which was the first increase in 7 years. Some banks are forecasting the OCR to peak at 3% in 2023. 

Geopolitical events can also have an impact on markets leading to additional volatility. By their very nature, geopolitical events are uncertain, and it is this uncertainty that impacts on share markets given investors are unsure what the economic fallout will be and how companies could fare. Now we see the focus shifting to the growing tensions in Eastern Europe. 

Where to from here?

We do not believe recent share market weaknesses will be sustained. Significant and sustained falls in share markets typically coincide with large economic downturns or recessions. However, a recession is not our expectation for this year, as we see the global economy recording above trend rates of activity growth this year.

However, higher levels of market volatility, or the daily movements of market prices, are likely to continue this year. Whilst it is impossible to know how and when geopolitical tensions will be resolved or how quickly inflation pressures will ease from today's elevated levels, we continue to focus on maintaining highly diversified funds. We have slightly lifted our cash positions over the past month and are seeking to take advantage of investment opportunities that increased market volatility provides. 

Our focus continues to centre on active management of the MAS funds, by continually assessing market conditions and making investment decisions that we believe will help the MAS funds achieve their return objectives over the medium to long term. 

What does this all mean for investors?

Share markets can be unpredictable, and your investments will perform differently over time. So, it's important to keep the long term in mind and see past any short-term peaks and troughs. It's important to have a sound investment strategy and to stick to it. 

It's also important to make sure you're in the right fund for your risk appetite. You can use our online risk profile questionnaire to help see if you're in the right fund for your circumstances. 

If you decide to change your fund after reviewing your risk profile or meeting an adviser, you will need to complete an investment strategy change request form which can be found here:

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If you want to find out more about how your investment is performing, you can see weekly updates on fund unit prices and returns on our website here:

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