What’s causing the most recent market volatility?

This recent market volatility is simply a reflection of the markets returning to a more normal monetary policy setting environment.

• Interest rates: Until recently interest rates have been at their lowest which helped minimise the impact of the global pandemic. Through the pandemic this helped provide businesses and consumers with a bridge to the other side of the pandemic so that both can take part in and contribute to a strong recovery. This has fuelled economic growth and helped drive the prices of assets, including shares, up to record highs. Interest rate rises over 2022 are now widely expected in many countries including the US, Australia and New Zealand. Interest rate rises are not only expected to negatively impact the value of a bond portfolio, it is also expected to cause volatility in share markets too. New Zealand started increasing the rates last year and faster than anticipated. It was one of the key reasons New Zealand shares did not perform as well.
• Inflation: On the other hand inflation has surged globally (this can be seen at the shops and petrol stations). Inflation readings in the US particularly have been very high, climbing 7% over 2021. Central banks are now taking action to control it by reducing stimulus and raising interest rates, and with the US being a major influencer in global markets, taking this action is driving significant and broad-based global market volatility. While this is not great news for home owners with mortgages, it is expected to help control inflation and positively impact investment returns over the longer term.
• COVID-19: The new COVID-19 variant Omicron has continued to spread at a rapid pace around the world, and has just started moving through some New Zealand communities with the whole of New Zealand moving to a red traffic light system. This has created some volatility in our local share market, however evidence to date globally has suggested that the Omicron variant is generally less severe in terms of illness than other variants. In some countries around the world which have already experienced Omicron, restrictions have largely been left unchanged signalling that we may be on a path where we can live ‘normally’ with the virus as it becomes endemic.

While it’s been great to see markets rally over the last 18 months (after the initial shock of 2020) fuelled by central banks stimulus packages, things are expected to slow down in the first half of the year with growth expected to rebound later in the year as the world works through the next steps in managing the new variant Omicron.

Things to remember in times of market volatility.
 
Stay calm - it’s about time, not timing. In-Tandem is a long term investment. Over time, the value of your In-Tandem investment will go up and down, depending on market conditions and how much you are contributing. Generally it pays to select a strategy appropriate to your investment timeframe and stick to it, as reacting to short term volatility may mean missing out on any market recovery that might follow. However, if your circumstances have changed or if you are really not comfortable with the movement in your investments this might be a sign you’re in the wrong fund. You can check which fund might suit you by using our risk profiler or by speaking with a Westpac Financial Adviser on 0800 942 822.
 
Diversify. You know the old saying about not keeping all your eggs in one basket? To grow your investments over the long-term, investing in a range of assets can help minimise risk and leave you better placed to achieve your investment goals. All of the funds available in the Westpac In-Tandem Scheme (excluding the Cash Fund) are diversified by asset class, meaning that they invest in a range of different types of assets. The proportion of each asset class differs from fund to fund. For example, the Growth Fund has a significantly higher portion in shares than the Conservative Fund. So when share markets are volatile, the Growth Fund is likely to be impacted to a greater degree. However, growth assets typically produce higher returns in the longer term. Whilst funds with an allocation to shares are likely to be affected by a fall in the share market, this may be balanced out by the performance of other asset classes in the fund. For example, there may have been positive returns for fixed interest and cash assets over the same period.
 
Keep contributing. Market downturns are not all bad. In a downturn, asset prices are lower even though the real underlying value of the asset may not have changed. This means that if you are continuing to make regular contributions to your In-Tandem account, you will buy more good quality assets at a lower price than you would typically pay. When the market rebounds, the effect of this is that the units in your account will be valued at a higher price.
 
Seek advice. If you need help reviewing your fund choice, it starts with working out your risk profile. Using our risk profiler or seeking the advice of a Westpac Financial Adviser on 0800 942 822 will help you understand your attitude to risk and manage periods of volatility.

You can keep updated on what’s happening in investment markets and the economy generally on this website.
 
If you have any questions about your account, please call the Helpline on 0508 IN TANDEM (0508 468 263).