Investment returns (before tax and fees) for the quarter ending 31 March 2022 are:

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The last quarter was all about the increase in uncertainty. Markets dislike when there is an increase in doubt. Uncertainties increased with the dreadful Russian invasion of Ukraine and with regard to the future level of interest rates. The outbreak of conflict only further inflamed inflation fears. Many central banks around the world (Japan excepted) raised their official overnight cash rate and inferred that further increases were likely. Talk of the unwind of policies that were implemented to counter the expected COVID impacts also spooked some market participants. All of this increased uncertainty led to falls in both share and bond prices (bond prices fell as interest rates rose) over the quarter.

What happens now very much depends on expectations with regards to the Ukraine situation and inflation. Central banks are expected to keep raising rates in an effort to control inflation. Inflation can have a nasty effect on the economy. The question then may become whether central banks have raised interest rates too far or too fast. Will this (raising of interest rates) lead to a slowdown in the economy, and by how much?

The International Monetary Fund (IMF) has downgraded its global growth forecast to 3.6% (from 4.4%) in response to the Ukraine situation and the lockdowns in China. The 2023 projection was lowered to 3.6%, from 3.8%. The IMF has also bumped up its inflation forecast for advanced economies to 5.7% and for emerging and developing countries to 8.7%.

As readers will be aware we have been cautious in recent times as we believed both share and bond prices may have been too high given the uncertainties that existed. However, we have and still remain cautiously invested and diversified. In this environment we held and continue to hold a higher than normal cash level. This cash will, and has been used as and when we see opportunities.

Investment returns (before tax and fees) for the quarter ending 31 December 2021 are:

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A positive quarter for funds, particularly those with exposure to shares. Long term returns were good across all the funds. COVID news continued to dominate but despite the markets being concerned at times shares carried on with their upward track, with some share performances in international equity markets performing strongly. Fixed interest (bonds) investments however were mixed with concerns around the inflation and interest rate outlook holding back returns in that sector.

The themes that may dominate in the next year (a continuation from late 2021) are inflation, interest rates and growth. Growth enhancing policies may recede, spare capacity in the economy is minimal and the re-opening growth surge is probably over. There is a lot of uncertainty as to how supply issues and labour shortages (and how long each may last) will affect outcomes. A fear is that labour shortages could result in wage growth which then results in higher inflation. These and other factors may determine how high inflation goes and how long it persists.

The inflation outlook may influence how quickly Government Central Banks raise official cash rates. Many expect major Central Banks to increase their respective cash rates this year. The level of interest rates in turn could impact on share prices (and other asset prices). We believe how far and fast interest rates rise will have a significant bearing on returns. Concerns around COVID continue to linger. Any geo-political developments could also surprise and affect returns.

The broad theme to start 2022 appears to be one of more optimism in the global economic recovery. Some research suggests the Omicron variant is much less deadly than Delta, giving markets confidence that the hit to growth from recently imposed COVID restrictions in some places (and more restrained consumer behaviour more generally) will be fleeting and the recovery will resume after a few months of disruption. There is little doubt though that whatever eventuates the markets could fluctuate, wildly at times. Rest assured, as we have mentioned previously, we are doing our best in these times of heightened uncertainty. The portfolios remain diverse and we focus on investments that we believe are more at the quality end of the spectrum.