Investors have been advised to take steps to actively manage the increased volatility of markets and forecast low returns on shares resulting from the collision of macroeconomic themes.
SG Hiscock and Company portfolio manager Hamish Tadgell said markets had experienced volatility following numerous factors.
“Even before the escalation of events in Ukraine, there had already been an increase in volatility as markets grappled with the tug of war between rising inflation concerns, monetary tightening and post-COVID economic recovery,” Tadgell said.
“The recent reporting season by Australian companies was, by and large, good from an earnings perspective. Cost inflation, supply chain disruption and labour shortages were issues universally cited by almost all management during reporting season. The burning question is: how much is event driven and COVID related, and will therefore recede, versus structural?
He said while supply chain disruptions appeared to have peaked, it would take some time for them to normalise, but even that was not a certainty.
“Looking back over history, rising inflation episodes have generally coincided with unexpected supply shocks. The COVID-19 pandemic has arguably resulted in the biggest supply shock in history with the effective lockdown of all economies,” he said.
“There is also growing evidence of structural changes driving inflation, including decarbonisation, rising popularist politics, greater government intervention and growing protectionism and geopolitical realignment. These are all inflationary and point to us entering a new higher inflation regime.
“Investors need to be aware higher inflation and interest rates will have an impact on asset prices and returns from equities will likely be lower going forward.
“The US Federal Reserve has confirmed it will increase interest rates this month, which will lead to higher real yields and create further issues for equity valuations – which, in some major equity markets, have already fallen 20 per cent from their peak in August last year.”
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