Next year was shaping up to be the year of Freedom! Freedom from covid; freedom from border closures; freedom from lockdowns!
Now we have been introduced to Omicron, a new covid variant which threatens to de-rail our freedom in 2022. The scientific community worldwide is now working fervently on what can be done to avert this disaster. We know it is a lot more virulent, but we do not know whether it is more deadly and whether our vaccines will be effective against this strain.
There are, however, some positive views on this new variant. Firstly, the mRNA vaccine technology is a lot more nimble in altering the vaccine to become effective against varying strains of covid. Pfizer has already stated that they should be able to produce an effective vaccine that combats Omicron effectively within 2 to 3 months. Moderna has a longer time frame for this at about 6 months. Secondly, it is also very likely that the current vaccine, with Australia now over 70% double vaccinated, will remain effective but at a lower efficacy rate. Lastly, although not known yet, there is hope that this new strain is less deadly than Delta.
Life has to go on and we shall overcome and prevail against this and other new variants which are sure to present themselves over time!
Turning to economic news – Australian GDP came in at a -1.9% for the September Quarter. However, this was well below expectations of a -2.5% GDP print, highlighting how resilient our economy is despite significant lockdowns in Melbourne and Sydney.
Our property market has continued to boom with about a 20% surge in house prices over the past 12 months. Equity markets have also had positive returns but have started to lose steam in the past couple of months. Most recently, news of the new omicron variant of covid has resulted in significant market volatility with a skew towards the downside. We are now seeing market movements in excess of 1% up or down on an almost daily basis. Uncertainty drives volatility and fear is causing markets to focus on downside risks given lofty valuations over the past 12 to 18 months.
There has been a lot of talk about inflation with one camp talking about it being transient and the other (the bears) talking about it as being longer-term. Our view is that parts of the economy will experience transient inflation due to supply chain disruptions caused by border closures, order backlog, and labour shortages. However, certain items will experience longer-term inflation. Take for example food. Farmers rely on seasonal employment from both immigration as well as tourists to work the fields during the harvest months. Due to covid restrictions, we have had no immigration or tourists over the past 2 years. This results in significant labour shortage with heavy pressure on wages. Furthermore, supply disruptions from overseas for seeds, fertilisers, feed, etc., has also resulted in lower production and higher costs. This will end up being transferred to the consumer in higher prices. This may remain for some time yet.
Labour shortages due to lack of immigration and tourism have seen hourly rates paid to staff in retail increase by 40% in some cases! We have already seen restaurants and cafés hiking prices. Rarely have I seen these prices get reversed when labour trends change. I think these price hikes are here to stay. The positive is, assuming no further lockdowns and the return of immigrants and travellers, that these price hikes should result in greater profits which then makes it back to money being spent in the local economy.
From July 2022, our tax rates are being reduced. This should, in part, circumvent the impact of higher cost of living (food, petrol, etc.). Our personal savings have increased during the covid pandemic as we have not been able to travel and, due to lockdowns, spend on entertainment, discretionary shopping, etc. This gives us a positive backdrop to our local economy as things open up and people are “let out” to spend.
“Stock market is a device for transferring money from the impatient to the patient” — Warren Buffet
We have remained patient but cautious over the past 6-8 months expecting increasing market volatility and a pull-back or two purely based on valuations. Now with Omicron, both market volatility and uncertainty have increased.
We have great solace in the fact that our portfolio line-up of fund managers and investments are fundamentally sound and have an active bent on the market with regards to monitoring for both risks as well as for opportunities. We will continue to monitor both the asset allocation of our investment models as well as our managers to ensure both deliver value to our clients.
We sincerely hope that you, our Most Esteemed Clients, will enjoy Christmas and New Year. We hope and pray for your Good Health, Prosperity, and above all, Happiness in 2022!