WEEKLY E-MAIL

8 March 2022

INTERNATIONAL WOMENS DAY & MARKET UPDATE

By Paul Nicol

International Womens Day

Happy International Women’s Day!

The theme of International Women’s Day is “gender equality today for a sustainable tomorrow”.

The diversity of our people at GFM is one of our greatest strengths, and we’re committed to creating opportunity and equity at work. We are grateful for the many smart, confident and high-achieving women we’re blessed to have in our team. In traditionally male-dominated industries, they are all trendsetters. We are proud of our progress and we are committed to doing more.

It’s estimated that 50% of women in Australia lack still lack basic financial literacy. While women’s financial positions are improving, men still hold an average of 12.3% more wealth than women. There are many things that contribute to this, but seeking financial advice is one way to further bridge this gap.

Market Update

Share markets have had a difficult start to 2022. Markets face a four-way collision of the pandemic, a geopolitical crisis (Ukraine), an interest rate tightening cycle and an inflation shock. This is a unique combination, and it is hard to understand the short impacts of how each issue intersects with the other.

We see unprecedented disruption in the supply of critical commodities. The longer the Ukraine invasion continues, the more pressing this issue becomes, underpinning inflation and damaging global growth.

Food accounts for just over 20% of the after-tax income for the lowest quintile of income earners in the US, with gas another 7%. Sustained increases in prices will drag on consumption and become more politically sensitive given the disproportionate effect on lower-income workers.

In terms of headline inflation, the average oil price was about US$75 in Q4 2021. At $120, we are looking at a circa 80 basis point (0.80%) increase in headline inflation.

Historically a geopolitical crisis such as Ukraine and the resulting supply-side shock (oil and natural gas, coal, wheat, barley, corn and sunflower oils) would be partly managed by reducing interest rates. But with the current inflation and interest rates, this is not possible.

Russia/Ukraine

Russia has been isolated from the global financial system. Sanctions imposed by Western governments include the cutting off of Russian banks from SWIFT, a communications system facilitating global money transfers. Foreign currency reserves held by the Central Bank of Russia have also been frozen. Share market index providers have announced that they will remove Russian equities from their indices.

This week, credit rating agencies S&P, Fitch and Moody’s downgraded Russia’s sovereign rating. S&P rates the country just two notches above default. The agencies said Western sanctions call Russia’s ability to service its debt into question. In retaliation, Russia announced capital controls that block coupon payments to foreign owners of Russian bonds.

There is also a notable degree of self-sanctioning, where companies refuse to buy Russian products. Trade and shipping companies find it challenging to insure Russian cargo or unload them.

Commodities

Oil futures breached $115 a barrel this week for the first time since 2008

Russia’s 5 million barrels a day account for about 12 per cent of global supply. This is already disrupted, and hardening public opinion may see the US ban imports of Russian oil, with other countries likely to follow.

Russia is believed to have enough storage to house surplus production for 2-3 months. Beyond this, they would need to rein in production, and once done, this is hard to unwind. This would present a medium-term constraint on oil supply and further increase the oil spot price.

Russia produces about 8% of the global LNG supply. Again, this may become hard to replace. In addition, Russia relies on Western technology and companies for infrastructure servicing and repairs, which could lead to further decreases in supply if withheld for an extended period.

Like oil and gas, coal prices are surging on tighter markets. Russia provides 17% of the world’s thermal coal and 9% of metallurgical coal.

Russia and Ukraine together supply 25% of the world’s wheat, 24% of its barley, 14% of corn and 58% of sunflower oils. The planting season is from late March into April, and the question is whether there will be access to seeds and fertiliser to allow proper planting. The wheat price rising 50% in 10 days reflects the risk.

Share markets

European markets are bearing the brunt now, but the consequences could spread.

Australia is proving to be the most defensive of markets, with the S&P/ASX 300 up 1.8% last week. It is down -3.5% in 2022 (as of Friday 4th March) compared to -8.2% for the S&P 500 (US Market), -13.4% for the NASDAQ, and is doing much better than European and Japanese equities. This is due to our combination of commodity exposure, geographic distance and strong economic growth.

Undoubtedly, the market’s saving grace has been the strength of the economy and corporate earnings.

But this degree of uncertainty and risk at present is likely to drive markets lower in the near term. Value opportunities in the market are now appearing, but patience is required for the short term.

Our view remains that investors should hold their nerve and that a long term investment strategy should not be altered.

Paul Nicol

Managing Partner
Senior Financial Planner
SMSF Specialist Advisor™
Barron’s Top Financial Adviser 2017-2021
Authorised Representative No. 230876

If you have any questions or comments, please email me at paul@gfmwealth.com.au

Disclaimer: This document is not an offer or invitation to any person to buy or sell any interest in or deposit funds with any institution.  The information here is of a generic nature, and does not take into account your investment objectives or financial needs.  No person should act upon this information without firstly seeking competent, professional advice specifically relating to their own particular situation.

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