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.
1. Diversification: The Scheme offers four investment options. Three of these, Stable, Balanced and Growth, are diversified funds. This means they invest in a variety of assets such as shares, property, bonds and cash, although in different proportions. The fourth option, Cash, invests in cash (and cash equivalents). Make sure you know what investment option you are in and the impact markets may have on returns.

2. Importance of seeking expert advice: Financial advisers can help you make the right investment decisions.

The right financial adviser can save you time and help you achieve your retirement savings. If you are concerned about the markets, considering changing funds, investing more money or perhaps withdrawing your savings retirement, then speaking with a financial adviser can help refine your goals, and provide tailored advice for your specific situation.

3. Stay calm - it’s about time, not timing.

You can access online tools to help you work out what fund you should be in and understand the impact markets may have on your investments. Take a moment to consider what sort of investor you are, by visiting and trying some of the tools available on the Sorted’s website here.

Need to withdraw money in the near future? If you are thinking of withdrawing your money for retirement, it’s important that you understand your savings may be reduced if investment markets weaken. As you approach a life milestone you may wish to alter your investment options to better reflect your risk profile.

When was the last time you logged in? Get to know the Scheme’s website. The website has plenty of information to help you with your investment journey. Accessing your online account enables you to view investment returns and account balances, adjust your fund options and update personal details. 

Documents: all documents can be accessed here.

This information has been prepared by Mercer (N.Z.) Limited for general information only. The information does not take into account your personal objectives, financial situation or needs. This information has been prepared by Mercer (N.Z.) Limited for general information only. The information does not take into account your personal objectives, financial situation or needs.

2 Feb 2022