Investment volatility has continued in May. The Garrison Bridge funds faced headwinds as both local investment markets and global equity markets remained difficult. A slowdown in economic activity combined with persistent inflation is likely to see interest rates continue to rise, not only in New Zealand but around the world.
The Reserve Bank of New Zealand (RBNZ) increased the Official Cash Rate (OCR) by 50bp to 2.0% in May as predicted. The commentary from the RBNZ that accompanied the rate rise clearly indicated that the OCR will “continue to lift at pace to a level that will confidently bring consumer price inflation to within the target range.” The target range as set by the RBNZ Monetary Policy Committee is 1% to 3%. Inflation currently sits at a whopping 6.9%, a long way from the target range. To provide some context on this, since the inflation target was introduced in New Zealand, the Consumers Price Index (CPI) has averaged around 2.2%, compared to over 11% in the 1980s.
Currently, rising inflationary pressures are being driven by ongoing supply disruptions, with a finger squarely pointed at Covid-19 persistence (i.e lock downs in China) as well as the Russian invasion of Ukraine. The latter continues to cause very high prices for food and energy. US inflation numbers are at 8.6%, the highest rate since 1981, while the UK inflation rate is 9.0% (as at April), the highest in 40 years.
According to the BBC, energy bills are the biggest contributor to UK inflation at present, as oil and gas prices remain at elevated levels. The average electricity price in April jumped by 95.5% compared to the previous year. Food prices are rising, mortgage rates are increasing and the cost of raw materials, household furniture, water bills and even the cost of postage has increased.
In New Zealand, underlying strength remains in the economy, supported by a strong labour market, relatively low household debt, continued Government monetary support, and easing of Covid restrictions. The re-opening of New Zealand’s borders from 1 July has been cheered by the tourism industry, potentially the sector that has suffered the most from Covid restrictions. Re-opening of the borders may also ease labour shortages although an influx of foreign workers or backpackers could be several months away.
Returning to the Garrison Bridge investment funds, the month of May was a negative month for the investment funds. Increasing investment volatility and a negative result is essentially an expression of market uncertainty. When markets turn volatile it is natural for investors to feel anxious. Investors can protect themselves during such times by broadly diversifying across and within asset classes. Within Garrison Bridge, our investment funds are diversified across Fixed Interest, Property and Equities to achieve this diversity.
Our investment committee is constantly reviewing the current market environment. While the current decline in investment markets is concerning, we regularly remind ourselves that we have been through market declines in the past, and it doesn’t last forever. It is likely that 2022 will require investors to remain patient waiting for positive news to change the direction of investment markets. In our view the longer-term prospects remain intact, it will just take patience and time for those prospects to come to fruition.
GBP and AUD / NZD exchange rate change from 30 April 2022 to 31 May 2022:
GBP and AUD / NZD exchange rate change from 31 May 2021 to 31 May 2022:
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