Monthly, we update our wholesale investors on what’s happening in the market. Running what’s probably the only late-night trading desk from New Zealand, we’re well-positioned to feel the pulse of the market’s direction.
September is often the worst month in the markets. And 2022 has been no exception. But with heightened volatility and more risk events than usual, I provide an expanded update today…
We’re riding a bear market and volatility is normal
Mindset is vital to succeed as an investor.
Far too many people tie their inner state to what’s going on around them.
When their share and property portfolios are up and life is a bowl of cherries, they’re confident.
When things get dark, they foresee Armageddon and their confidence disappears.
As a result, they ride a roller coaster.
Some can’t take it and close portfolios, or switch out of growth funds at the worst possible time. Too often, they crystallise needless losses.
It’s vital to remove fear from investing. Examine the situation and price the potential outcomes over a term of at least 3 years.
Fortunately, our wholesale clients tend to be sophisticated. So the question we get asked in these times is more along these lines…
Is the bottom of the market in yet?
That’s the time they want to channel more funds to catch the inevitable upswing.
We’ve seen before a grim September, with prices roaring back in October — then continuing to climb to the crescendo of a Santa Rally.
My answer to this question is that you can never really pick the bottom. It’s a fool’s errand. And besides, there are many potential bottoms.
Arguably, the bottom for commodity stocks was in June. Maybe for real estate stocks, it’s now.
By not having funds ready, you miss a myriad of potential bottoms. And by the time you spot one, the tide moves too fast.
Is this time any different?
We’re possibly in the midst of an uncalled recession. The average recession since World War II has lasted about 10 months.
This creates distinct opportunities.
- Utilities and energy as strong defensive picks.
- Banking as medium-term exposure to growing interest rate margins.
- Real estate as many listed businesses continue to offer startling discounts on listed property assets.
Across our strategy, we’ve identified 46 undervalued situations. Throughout the developed markets we follow.
Support remains strong for markets
Despite concerns around inflation, jumping interest rates — leading to recession — and Ukraine; what we’re seeing on the trading desk is a strong willingness to invest in value stocks.
Last week, this was aided by the Bank of England’s intervention in the bond market. Markets panicked unnecessarily following plans for tax cuts in the UK.
Bank of England. Source Wikipedia
Clearly, governments and central banks continue to hold the line they did in 2020. Ready to step in to stabilise and support markets when needed. Though they can overshoot and cause more problems too.
There are signs that inflation might be peaking. Despite geopolitical tensions, oil and container shipping prices are easing.
As the Bank of England talked bond-buying, they also promised to do what it takes to bring inflation down to 2%.
The sort of indiscriminate sell-off in September saw much of the market getting oversold.
I haven’t seen this much value on the table since 2020.
2022 was meant to be the year of recovery.
It’s ended up being a ‘mop-up’ of monetary overshoot from Covid-19 over-response.
Interest rates went ridiculously low. Currency eroded. Then the war over Ukrainian borders erupted at the same time — involving two major food and energy producers.
The historic all-time real average interest rate since 1311 AD is 4.78%. Clearly, mortgages at 2.5% were too low.
Now there’s the risk central banks will over-tighten things. Though inflation is pernicious, so maybe you can’t blame them this time.
Overall, for the month of September 2022, we were down 6.96% across the composite portfolio (total aggregate return across all portfolios following the strategy). This brings our overall return for the year tracking at –9.80%. And our average annualised return since inception at 13.78% p.a.
Markets can be volatile. Our worst month in this strategy was March 2020. Although we were down 23.95% following the Covid-19 market crash, we still eked out a positive return of 5.36% for the year.
Please see our performance chart for more details.
Data to the end of August 2022, before the September rout, showed the average KiwiSaver Balanced Fund was down –8.5%. Growth funds were likely down more.
Some managed funds we watch are down over 19% this year.
New Zealand house prices are expected to fall by about 15%.
Our strategy is holding up very well. And we expect to be in a strong position as headwinds abate and the cycle turns.
Meanwhile, our clients are enjoying an approximate running yield of around 6% p.a. thanks to dividends. They’re being paid to wait this out.
Of course, we cannot stop viruses, wars, or other risk events. But from years of experience, we do know how to price risk and navigate rough seas.
We eat our own cooking. For the reasons above, we are investing our own funds alongside our clients in our strategy right now.
There is potentially too much to lose out on by not investing now.
This week, we’ll be reaching out to our existing and prospective Vistafolio clients. To offer a current market briefing and answer any questions on the current opportunities available.
If you’d like to take advantage of this, please simply reply to this email. Or arrange a time with John Ling (CIO) when he touches base.
Editor, Wealth Morning
Past performance is not an indicator for future performance. Your actual portfolio will differ from the composite portfolio mentioned. The information contained in this document does not constitute an offer to sell or a solicitation to buy an investment, nor should it be construed as investment advice. Vistafolio investment services are available to Eligible Investors and Wholesale Investors (not to Retail Investors) as defined in the Financial Markets Conduct Act (2013).