What is happening in early 2022?
Now economies are starting to overheat. Unemployment has fallen to low levels both here and abroad. We're now seeing high inflation around the world. Just this week, New Zealand's Consumer Price Index reached nearly 6%, the highest annual inflation rate in three decades.
The world's major central banks and the RBNZ have mandates to target inflation. In the case of the RBNZ, the goal is to keep consumer price inflation between 1-3% - so now inflation is way too high from the RBNZ's perspective. It's a similar story offshore, with economic growth and inflation getting stronger. Accordingly, central banks are starting to remove some of the extremely low "emergency" interest rate settings that were put in place during the pandemic. This process is well underway here, with the RBNZ raising its Official Cash Rate twice last year. Other central banks are starting to follow the RBNZ's lead. Interest rates are increasing - from bond yields to term deposit and mortgage rates. Property prices have surged during the pandemic, but borrowers are facing higher interest rates than a year ago, and that's impacting the outlook.
Inflation and interest rate developments have been a major focus for sharemarket investors over recent months, and the situation has rattled some investors. We also have some international tensions, with Russia looking threatening on the Ukraine border, the Omicron variant of Covid, and concerns over the Chinese economy.
As a result, some investors both here and all around the world have taken fright and decided to sell their shares. The result was a dip in share prices, and thus a dip in our funds that invest in growth assets. Rising interest rates are also a headwind for some of the income assets (like cash and bonds) within funds.
Through mid-January, the US share market was very volatile, with high volumes of selling and buying. Most of this activity was from retail investors. But many people see this dip as an opportunity - after all, for every seller there is a buyer. At the time of writing in early February both the local and international sharemarkets have lifted several percent off the mid-January lows.
Our own investment advisors, BlackRock, have said they think there may be a little more volatility ahead, but they still think 2022 will be a good year for sharemarkets. They also point out that this dip is very mild compared to others over the last decade or so. You can read more analysis from BlackRock here.