As we move on to the final throes of the year the focus across global markets is increasingly on the trade-off between inflation and growth. In this Investment Insight, we outline the key themes that we believe will test markets and drive client portfolios in 2022. Inflation abounds Inflationary pressures remain stickier than many had believed. The United States Consumer Price Index (CPI), a key measure of inflation, rose to 6.8% in November and core CPI increased to 4.9%, a 30-year high. With inflation clearly more persistent than many had anticipated, a clear theme for 2022 is tightening financial conditions i.e. increasing interest rates. Global financial conditions remain extremely loose. Indeed, higher actual and expected inflation has kept real interest rates in many countries deeply negative. This naturally encourages investors to move further out on the risk spectrum. This will change in the coming year. Over the last month, the United States Federal Re...

Over recent weeks I have found myself wondering how many letters there are in the Greek alphabet. The answer is twenty-four and it turns out Omicron is the fifteenth letter. It is of course Greek letters that are assigned to COVID-19 variants as they emerge. It was news of this latest variant, Omicron, that has contributed to recent Global share market volatility. I like to finish my columns for the year with a light-hearted article in December, but it seems the Greeks have disrupted my plans. Investment markets have been 'climbing a wall of worry' as the spectre of a new variant that could require further lockdowns plays on investors' minds. To qualify as a correction, a share market must fall by 10% or greater. I have lost count of the number of market corrections that I have observed alongside my clients. My observation is that, in retrospect, there is a sameness about all of them, but in the heat of the moment they all feel very different. The sameness ...

As inflation and interest rates increase, bond portfolios have experienced volatility. Although market uncertainty can be challenging, it does present opportunities for investors. In this Investment Insight we are going to step back and discuss what determines the return investors receive from a bond. A bond is the same as any other asset in that its return is comprised of two components – the income it generates and the capital value of that asset. The first of these is simple to determine – the income you receive from a bond is the (typically fixed) coupon that a bond pays quarterly or semi-annually. It is the capital value of a bond that may lead to confusion. Its value can move in a way that is not initially obvious. A good way to describe the change in capital value is to use property as a comparison, as this is an asset class most people are familiar with. As well as being something we can own, a property can generate income through rent...

Investment performance update During the financial market rebound, NZ Funds acquired several positions which we expected to benefit from the world returning to normal. As the market rebounded these paid off and generated above index returns for the year ended 31 December 2020. Gains continued into 2021 with one of the strongest starts to the year NZ Funds has seen. However, from 1 April onwards positions became more volatile. This volatility led to most Portfolios giving up their gains from earlier in the year. While we have retained the capital gain over the index for 2020, to align the Portfolios more closely to their benchmark for the remainder of 2021, and for 2022, we have substantially reduced risk, acknowledging the current uncertainty around interest rates and Omicron. We remain strongly of the view that a well-diversified portfolio, which contains assets which profit from rising inflation and interest rates, will be more resilient throu...