America's S&P500 index was down over 11 per cent at one point during January. Photo / AP
January was a month to forget for sharemarket investors, and still more volatility looks likely as the year progresses.
The main S&P/NZX50 index shed 8.8 per cent over the month - making it the worst month since 2008 and its third-worst month since the index began in 1957.
Most other equity markets experienced similar volatility, with the America's S&P500 index down over 11 per cent at one point during the month.
"And while it is never pleasant seeing share prices fall, this type of short-term volatility is the price that must be paid for the superior returns that shares provide over the longer-term," Castle Point Funds said.
"In the context of a long holding period these events can look like mere blips," the boutique fund manager said in a commentary.
"While volatility is one measure of risk, in our opinion, much more consideration should be given to the risk of permanent loss of capital.
"Provided investments have some genuine substance, the price paid is not too high and there is some diversification, short-term volatility does not determine the long-term outcome. And this is very much how we continue to view our funds and all their underlying investments.
"On the positive side, short-term volatility can, in fact, be good for the active investor. It stirs up the emotional juices that leads to panic selling that can create wonderful opportunities for the longer-term investor," Castle Point said.
Higher consumer prices mean high interest rates and bond yields here and around the world have been reflecting the fact that central banks are going to have to be more assertive to get the inflation genie back in the bottle.
The 10-year swap rate is now running just at just under 3 per cent - the highest point since November 2018 - so the question facing investors is how high will interest rates go.
One theory holds that because the world is now more indebted than ever, it will take relatively small official cash rate increases in order to have the desired monetary policy effect.
David McLeish, head of fixed income at Fisher Funds, said increased volatility in the equity markets was due at least in part to rising interest rate expectations.
"And New Zealand is certainly not immune from that."
Higher interest rate expectations have a negative impact on equity valuations in general.
"Then there is the other link which is more specific to New Zealand, which is that there are a number of local companies on the NZX that are high-dividend paying.
"So there are a couple of direct and somewhat secondary impacts that are filtering through from the bond market into equity markets, and some are more specific to New Zealand," he said.
"The rise in interest rates on bond yields that we have seen recently has been far more abrupt than the falls that we have typically seen over the last 10 years, so it feels more amplified."
McLeish said investors will require cool heads as the high inflation/high interest rate scenario unfolds.
"In fixed income there is a positive flipside to those previous negative returns from fixed income assets last year, and that is higher yields."
"When it comes to equities there is a lot of focus on the near-term inflation environment and there is already a lot of inflation in the system.
"There is a bit more in the pipeline still to come but I think the next quarter or two will still see inflation very high - maybe higher than it currently is - but looking forward we are seeing a number of signs of alleviation of these inflation pressures.
"That I think will be positive for both fixed income and equity markets in the second half of the year.
"When you see this kind of volatility across all markets it can be quite concerning but cool, heads will prevail and I don't think looking at the near-time term picture that we should be making long-term investment decisions."
Higher interest rates tend to hurt two groups - those stocks that are very expensive and the pure yield stocks, Salt Funds managing director Matt Goodson said.
The key for many stocks will be whether they have pricing power - the ability to pass on costs to their customers.
"It is very clear that we are in an inflationary environment at present. The jury is still out as to whether that inflationary environment will still have okay economic growth, or an environment that is more stagflationary in nature.
"That would be very negative outcome, but the jury is still out there."
As central banks around the world look to increase their official interest rates, Goodson says they could well get more bang for their buck in their war against inflation than in previous high inflation times.
"Clearly, there is a lot more debt in the economy this time around so it may well be that central banks will not need to go anywhere near there to start having an impact on economy and on inflation."
Westpac New Zealand has launched a five year fixed rate note in a bid to raise up to $100 million.
The note has an indicative yield of 3.595 per cent to 3.645 per cent with a minimum investment of $5000 with the final rate due to be set today (Feb 11).
At that rate it makes it potentially more attractive than Westpac's five year deposit rate which is currently paying 3.2 per cent.
But with the official cash rate forecast to rise from 0.75 per cent to 2.5 per cent by midway through next year, investors could be better to hang off until later in the year for better rates on offer.
All of the banks are likely to be launching bond or note offers in the coming years as their minimum capital requirements are set to rise.
Bank deposit rates have been rising in recent weeks. Kiwibank, Westpac and BNZ have all increased term deposit rates in the last week.
But it's still going to take quite a bit more for deposit rates to beat out inflation which is at a 31 year high of 5.9 per cent.
Vulcan Steel was one of 2021's IPO success stories and its bumper first-half profit shows that it is handling Omicron disruption well.
Increased activity and higher margins have translated into an 85 per cent lift in first-half net profit and an upgraded annual earnings forecast for the Australasian steel distributor, which derives most of its business from Aussie.
The company, which listed last November, said its net profit came to $54m in the six months to December from $29m in the previous corresponding period.
Harbour Asset Management portfolio manager Shane Solly said Vulcan had done well to navigate a challenging Omicron outbreak in Australia well - something other businesses have really struggled with.
New Zealand shares ended firmer after Infratil and Spark posted gains.