K-shaped recovery will bring novel investment opportunities.
By Mark Ryland, Milford CEO
2022 was another challenging year most of us will be glad to see the back of. It can be difficult to recall “life as we knew it” prior to March 2020. After more than two years (and counting) the pandemic has left a legacy of change and – in terms of markets – turbulence and uncertainty.
Borders, thankfully, have re-opened and, in the northern summer of next year, I’m looking forward to visiting my elderly mother for the first time in a few years and my son who lives in Paris. No doubt when I finally see my mother, she’ll comment on how much older her son seems to have gotten in the intervening period!
The ‘working from home’ revolution, initially forced on us by lockdowns, has permanently re-shaped aspects of office life. It will be very interesting how it all settles down in the long run.
But without being naïve about managing some implications, having spent years juggling three children and demanding jobs along with my wife (she had it the toughest), I believe this increased flexibility is a positive consequence. It supports the workforce changes we have all seen over the last 25 years and can only help the daily routine, work-life balance, and support greater diversity in the workforce. These are goals worth pursuing.
If I look back over the last two and a half years, I think we have seen what is termed a “K-shaped” recovery, whereby different parts of the economy recover at different rates or times, i.e. in different directions – like the arms of the letter “K”. For some, although disruptive, it’s led to boom times helped by historically low interest rates. For others, it’s been a very tough period and has likely created a greater disparity between the “haves” and “have nots”.
The outlook of governments, consumers, and businesses alike is now being coloured by rising interest rates and the highest levels of inflation in 30 years, both of which are serious consequences of the pandemic. These will likely impact all of us in some shape or form. Against this backdrop of change and costs, everyone’s optimism is being challenged.
What about our personal situations? Like everyone else, I’m keeping a close eye on spending and expenses.
I worry for the younger generation – like my daughter struggling to get a foothold on the Auckland property market, or others already mortgaged up to the rafters handling steep interest rate hikes.
My son thinks it’s cheaper to live in Paris than Auckland! That makes me feel uncomfortable with New Zealand’s current position. Can we keep our young talent or attract replacement talent?
Disciplined budgeting, access to and taking good advice, thinking about your financial goals and then taking a longer view in light of these goals – all matter more than ever, precisely because of the disruptions of the past few years. Despite turbulence, some fundamentals haven’t changed.
It’s important to seek advice from professionals, just as you’d go to a doctor – ideally a real one, not ‘Dr Google’ - to check on your health. Qualified, expert financial advice can support not only your thinking and planning to achieve your goals, but can also prevent you from making poor decisions during market volatility that could hold you back in the long term.
One example that might be familiar to many people right now: worrying and stopping your KiwiSaver contributions during market volatility may not actually alleviate your financial situation today to any great extent. But it could cause significant repercussions when you retire, with a lot less in your KiwiSaver than you otherwise would have had.
With the “K-shaped” recovery, I am more conscious of the need to support the broader community. That’s where the focus and generosity of the Milford Foundation is making a positive difference – watch out for more announcements in 2023.
Historically speaking, from a purely financial markets perspective, we’ve come through an extraordinary market run. Markets move in cycles and this time round we enjoyed a long 11-year ‘bull’ market. It made investing look easy, with little fundamental analysis required to earn strong returns.
Now the backdrop is less certain. While the short-term picture may be one of depressed market performance, there are signs of the clouds clearing, although risks remain.
Over the medium term, market adjustments are potentially clearing a path to attractive future returns. We believe interest rates are close to the peak. Inflation will respond to higher rates, and lower interest rates will follow as the cycle continues.
Today, valuations are more attractive than they have been for some time, so expected future returns from bonds and shares could be higher from this starting point. We remain of the conviction there are always good companies with reasonable valuations to be found to invest in.
That said, the remaining uncertainty, and range of potential outcomes for the economy and markets, requires a flexible approach from professional investors coupled with a strong investment process to make the most of the opportunities.
A changing investment landscape like this will deliver novel investments and, as an active fund manager, our team is excited about finding and investing in these over the coming year.
That’s how 2023 is shaping up for me and the people I work with at Milford and the many thousands of clients we have across New Zealand. After nearly three of the most extraordinary years in our lifetimes, one thing I’ve learned is how resilient we all are. Considering your goals, your behaviour and the advice available to you, will all help you to navigate the year, and opportunities ahead.
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Disclaimer: This article is intended to provide you with general information only. It does not take into account your objectives, financial situation or needs. Milford Funds Limited is the issuer of the Milford KiwiSaver Plan and Milford Investment Funds. Please read the relevant Milford Product Disclosure Statement at milfordasset.com. Before investing you may wish to seek financial advice. For more information about Milford’s financial advice services visit milfordasset.com/getting-advice. Past performance is not a reliable indicator of future performance.