Members Only: Our Quarterly Update - February 2023 | Lighthouse Financial

Members Only: Our Quarterly Update – February 2023

Our quarterly update from the Lighthouse team

Quarterly Update

So long and good riddance to 2022. War, inflation, rising interest rates, and economic bottlenecks led to poor portfolio returns. 2022 was unusual in the sense that equities and bonds both fell simultaneously by significant amounts. Usually, bonds act as a safe haven when equity markets fall. As a result, a balanced 50/50 portfolio of global stocks and bonds had its worst year in nearly a century.

Markets had to adjust to interest rates returning to more normal levels, and large-cap growth stocks (such as Meta and Tesla), which had led the market on the upside, suffered much larger declines than the overall market. Purely speculative investments, such as digital currencies and NFT tokens, were harder hit still, with some suffering complete capital loss. These types of adjustments – unfortunately – occur every cycle as speculative excesses are worked through (or, less euphemistically, as the naïve are parted from their money). Closer to home, we also saw residential property prices begin to fall – ending the myth that they can only rise.

Despite the seismic shift in interest rates and accompanying asset price declines, one welcome thing that we didn’t see over 2022 was the type of stresses associated with the global financial crisis of 2008. Overall, the adjustment to higher rates globally has been orderly, and, as discussed below, the silver lining is that we should now expect higher longer-term returns from most asset classes, given higher cash rates and income yields on offer. In our view, risks are now more evenly balanced. Although economic growth is expected to be weak in 2023, with many economies likely to be in recession, this reduces the risk of higher core inflation. Energy prices are now clearly off their peak, partly due to the good luck of a warm European winter, which will reduce headline inflation rates.

The Outlook

No one can consistently forecast short-term market movements, though, as per our last update, inflation is the key economic determinant for markets to form a bottom and rally from current levels. Current and forecasted interest rate levels should be sufficient to reduce inflationary pressures, though the surge in Covid in China may reignite short-term supply-side challenges. Of course, we also need to consider the war in Ukraine, which presents considerable uncertainty and both upside and downside risks.

One thing we are more confident about, given both long-term financial history and basic investment logic, is that over the medium to longer-term markets offer a premium over cash to compensate for their higher level of investment risk. With central banks having finally done their jobs and raising rates to more normal levels, we should expect higher longer-term returns. To take a simple example, NZ investment grade bonds now offer running yields over 5% per annum (a 1% or so premium to the OCR), compared to under 2% a couple of years ago.

Your Portfolio Returns

High Growth Portfolio

Overview

Growth Portfolio

Overview

Balanced Portfolio

Overview

Moderate Portfolio

Overview

Defensive Portfolio

Overview

James Blair
Wealth Director
+64 27 399 5175

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