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Quick Market Update 

Investment markets are currently being driven by 2 risk events:

1. Inflation and rising central bank rates

2. Russia / Ukraine conflict

In isolation, market sentiment would’ve settled already. However, markets are struggling right now to account for the combination of both and the spectre of both feeding off or into each other.

What we’ve been trying to do is to separate the following 2 factors in relation to the 2 risks in question:

1. Sentiment

2. Direct implications

Sentiment isn’t based on fundamentals, rather it’s behavioural, but it’s also not something we can openly ignore. Right now, the sentiment to both risks are deeply negative, but is rather irrational in that we feel it’s overblown. That is:

1. Whilst inflation is high in some jurisdictions and rising in others, we don’t think central banks will raise rates aggressively and we don’t think they can get rates much higher from here

2. Whilst the conflict is terrible for all involved, both directly and indirectly, we think there is a deal to be done that makes all sides appear as the victors (because sadly that’s what’s important in politics).

Given this, we think sentiment indicators are too negative, and this in isolation presents an opportunity to very selectively add more risk to portfolios for those with a greater risk appetite and those with a longer investment horizon.

However, we must also consider the direct implications of both risks on economies (e.g., recession) and markets (e.g., earnings).

In terms of the inflation problem, which is further exacerbated on the energy side by the conflict, there are direct implications for:

1. Earnings – ie. how does inflation impact demand, supply, profit margins, and costs

2. Valuations – ie. how does rising rates, in order to fight inflation, impact valuation sensitivities (e.g., will expensive stocks remain under pressure)

3. Balance Sheet – ie. how does rising rates impact corporate balance sheets and cashflows

In terms of the conflict, and the longer it takes to achieve a resolution, there are direct implications for:

1. Economic growth – ie. the probability of a European recession is rising and negative economic spill over to other economies

2. Commodities – ie. both supply and prices, which will benefit some nations (commodity exporters) and hurt others (commodity importers)

3. Government balance sheets – ie. further strain on government balance sheets in terms of defence spending and potentially more stimulus (if required)

Perversely, the direct implications of the conflict aren’t necessarily bad for markets as it means the central banks won’t be able to raise rates aggressively and governments may need to be more supportive.

Coming back to the main prevailing risks right now, sentiment is clearly negative at present. But the counter to this is that companies are fundamentally in very good shape – ie. earnings are strong and robust; balance sheets are relatively clean. Europe is the most adversely affected by the conflict and could possibly tip into recession this year. Obviously bad for Europe, especially given weak economic growth over the last 10 years or so, but that could prove to be a positive for the US, Australia, and some emerging market countries.

At this point, the conflict is negative news flow, but it’s not impacting company fundamentals. We also think the market will get their much sought-after clarity on the likely US rate path over the next month or so.

With that said, we remain comfortable with being invested right now – ie. we’re not looking to take risk off the table. If anything, we’re looking for an opportunity to add risk into portfolios.

One area that has piqued our interest is upward commodity price pressure and the implications for the Australian economy, Australian cash rates, and the energy and resources complex. More specifically, do broader Australian equities win with that backdrop or is it a narrower subset of Australian equities that win, and are the implications of Australian dollar strength on offshore currency exposure (ie. hedging).

General Advice Warning

The information in this article and the topics and strategies discussed are of a general nature. It does not take your specific needs or circumstances into consideration, so you should look at your own financial position, objectives and requirements and seek financial advice before making any financial decisions.

If you are seeking financial planning services like ethical investing, retirement planning, to wealth management in Brisbane, book your consultation with us and see how we can help grow your wealth in more ways than one.

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CB Wealth Australian Pty Ltd T/As HH Wealth is a Corporate Authorised Representative (No. 1283595) of Axies Pty Ltd ABN 38 136 704 446 AFSL No 339 384. Chris Holme is an Authorised Representative (No. 1004793) of Axies Pty Ltd ABN 38 136 704 446 AFSL No 339384.

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