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2022 rate rise, US earnings season, Europe on a knife-edge & SB Recommends!

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Welcome 2022

A new year begins much like the last two ended, in the grip of the daily COVID updates. 2020 gave us Wuhan, the Ruby Princess, lockdowns and a new normal. Despite the hope for better in 2021, Delta proved the undoing of NSW and Victoria, and even with the vaccine rollout, Omicron still made hay the world over.

It is easy to slip into negativity and fixate on the uncertainties and challenges that remain. At Stanford Brown, we acknowledge the challenges and proceed with caution. But we also proceed with optimism. The past two years have emphasised the value of togetherness, relationships, and resilience. We know there will be more twists ahead but nothing we cannot overcome. We very much look forward to welcoming you all to our offices in 2022, we look forward to hosting client events in 2022, and importantly we look forward to celebrating our 35 years in business in October. Welcome 2022!

 

Markets Fret on Powell Commentary

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The US Federal Reserve signalled on Wednesday that it will commence the widely anticipated interest rate increases from March, reversing monetary policies that have fuelled the post-pandemic recovery in economic growth, employment, and asset prices — but also unleashed concerningly high inflation.

While the announcement that rate rises would commence from March was very much in line with market expectations, the additional comments which followed were less comforting for investors. In the subsequent news conference, Fed Chair Powell said that inflation has gotten “slightly worse” since the Fed last met in December. He added that raising the Fed’s benchmark rate, which has been at zero since March 2020, will help prevent high prices from becoming entrenched.

Some economists have signalled surprise at the likely intensity of rate hikes sketched out by Powell, who said the economy is stronger now than in 2015 when the Fed began to raise rates slowly. The fear is that the Fed is signalling that they are going to be moving at a quicker pace than previously anticipated. In addition, Powell stated, “I think there is quite a bit of room to raise interest rates without threatening the labour market,” signalling a comfort to move more aggressively without risking their employment targets.

Despite an initial positive reaction to the Fed announcement, as the subsequent comments at the press conference were digested, the US markets, which were open for trading at the time, started to turn notably downward.

It is important to step back and not get overly caught up in the microanalysis of every word. The key item is rates will be rising from March, as anticipated. Ultimately, this is a more prudent path than the alternative of artificially maintaining rates lower for longer and risking inflation reaching levels that would be difficult to reign in. The path of adjusting from emergency monetary policy settings back to normality was never going to be a smooth one, but that is not a reason to overreact at every turn. A measured approach is essential during this period.

 

Europe on a knife-edge

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Russia has accumulated tens of thousands of troops alongside its border with Ukraine in recent months, fuelling fears that an invasion is imminent.

World leaders including the United States, NATO and the European Union have warned Russia against aggression, threatening severe sanctions in retaliation. Over recent days, with tensions continuing to escalate, the US has placed 8,500 troops on alert for potential deployment to Ukraine.

Speculation has also been growing that Putin may see the backdrop of the Winter Olympics as a suitable window to make his move. He has some history in this regard. Putin invaded Georgia in August 2008, just before the start of the 2008 summer Olympics (Beijing) and invaded Crimea in February 2014, right after the end of the 2014 winter Olympics (Sochi). An attack during the Beijing winter Olympics would be a poor strategic move for Russian Chinese relations. A relationship that is very important to Putin given his reduced sphere of influence on Russia’s Western Front, albeit a move shortly after the games would be consistent with his prior playbook.

The growing tensions have also served to cast a shadow over energy markets, and the uncertainty could mean a prolonged period of high gas prices for Europe, given their current supply is made up approximately 35% from Russia. Should sanctions be placed on Russia, or should Russia choose to manipulate gas supply as leverage in the conflict, the potential for prices to soar, particularly during the Northern hemisphere winter, is significant!

 

US Growth surprises to the upside

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In figures released overnight, the US has posted its strongest economic growth rate since 1984, driven by business investment and growing consumption that offset early negative impacts from the Omicron variant’s spread. This saw the total value of the American economy grow to a new high of $US22.99 trillion in 2021.

Gross domestic product (GDP) expanded at a 6.9% annualised rate in the December quarter. This was a significant surprise to the upside as the prevailing expectation from economic forecasters was for an annualised 5.5% in the December quarter following the 2.3% posted for the September quarter. Embedded in the report was also yet another sign of surging inflation, with widespread supply shortages and elevated consumer demand pushing up prices. The GDP price index soared by 6.9%, the most since 1981, exceeding consensus estimates for a 6.0% gain.

It is worth remembering that the quarterly GDP report serves as a backwards-looking indicator capturing the economic momentum heading into the first quarter of 2022. Many economists are anticipating an inevitable deceleration in growth for the start of 2022, as the further spread of Omicron dampened activity along with other post-holiday drags to the economy. As the US economy prepares for the headwind of rising interest rates, these quarterly growth numbers will be highly anticipated, particularly should they be seen as a catalyst for more aggressive rate rises. All eyes again turn to the Fed for their reaction.

 

Record Profits

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Early this morning, following the close of trading on US markets, Technology behemoth Apple reported its largest single quarter in terms of revenue ever, with sales growing over 11%. This record quarter was achieved despite supply challenges and the lingering effects of the pandemic. Notably, this result was markedly ahead of analysts’ expectations with Apple exceeding estimates for sales in every product category except iPads. This strong showing from Apple was particularly pleasing given calendar Q4 is the most important quarter for the year with the surge in holiday season sales.

Speaking to the media after the release of the figures, Apple CEO Tim Cook advised that pleasingly the companies supply issues were starting to show signs of improvement. This is particularly important because supply issues have beleaguered vast waves of the economy through 2020 and 2021 and analysts are seeking signals on whether 2022 will see a marked improvement or more of the same.

Today’s result from Apple builds on the positive update from Microsoft earlier in the week where they reported US$51.73 Billion in revenue for the quarter. The stock initially dropped in trading but turned positive after the company issued a sales forecast that also exceeded estimates. Revenue increased by 20% from a year earlier, and Microsoft’s net income swelled by 21% to US$18.77 billion.

In evaluating the surge in technology company share prices in recent years, as compared to the .com bubble years of the early 2000s, it is very much worth pausing to differentiate those with valuations based on anticipated future growth and profits from those which are cash-flow and profit monsters such as Apple and Microsoft. Not all shares in the sector are valued on fairy-tale PE ratios.

 

Dixon Advisory enters Administration

Last week saw beleaguered ASX listed Wealth Management firm Dixon Advisory file for voluntary administration. In a statement to the ASX on January 19th, the firm’s parent company, E&P Financial Group, announced that PwC had been appointed as voluntary administrators to Dixon Advisory Superannuation Services after the directors determined that “mounting actual and potential liabilities mean it is likely to become insolvent at some future time”.

The potential liabilities were growing because of a wave of class-action lawsuits from clients unhappy at recommendations to invest in Dixon’s in-house products. The highest profile of which was the US Masters Residential Property Fund which had charged high fees and returned significant income to the Dixon parent group but delivered highly dissatisfactory outcomes for investors.

The pressure had been mounting on the group over recent years as the media, particularly the AFR, wrote numerous articles focusing on their clients’ experiences. Given this high-profile coverage, the move into administration was not wholly unexpected. Albeit, it still serves as an unfortunate step backward for the financial advice industry that has been making significant progress in the post royal commission years.

 

Worst Year Ever?

No doubt the pandemic consumed early 2020s are a challenging time but placed in the context of wars, famines, and natural disasters, it probably doesn’t get close to the worst periods in human history.

Should you have a fondness for history and a strong constitution then you might just enjoy this brief 24 minute podcast from NY based WYNC Studios RadioLab looking into ‘What was the worst year to be alive on planet Earth?’. In the podcast, RadioLab make the case for 536 AD. Not to steal the punchline but the highlights include a super volcano, the disappearance of shadows, a failure of bread and topped out with plagues of rats. Suddenly the early 2020s doesn’t seem quite so bad.

 

10 billion vaccine doses

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Omicron arrived in Australia with a bang in late November, much as it did across the globe. As quickly as the case numbers spiked, they subsequently started to recede in most regions. This has led many to enthusiastically predict Omicron will mark the beginning of the end of the pandemic and the move into an endemic phase.

It does appear the worst of the Omicron wave is behind us, and possibly the worst of the pandemic, albeit it is too soon to predict that with confidence. Ultimately it will be a combination of factors that leads the world out from the pandemics grip, most significant of which will be the success of the vaccine rollout to all parts of the globe.

As the global vaccine rollout reaches the 10 billion shot milestone, I share a link to the Bloomberg Global Vaccine Tracker which offers an excellent visual illustration of the haves and the have nots of this medical campaign. We also continue to share the Financial Times rolling tracker.

 

SB Recommends

Following on from the festive contribution to this feature by SB Principal Nicky Boustred, today we start the new year introducing SB Private Wealth Adviser Aaron Wijesinghe who shares his recommendation for family movie night. Enjoy.