Investment Losses Will Recover

The severe share market sell-off this calendar year has been concerning. The All Ordinaries Index has fallen 1,100 points in the first nine months, a drop of fourteen per cent. It has recovered a little in recent days. Overseas shares have fallen more.

The main cause of the losses has been the rising interest rates, increased to control the big jump in inflation. No-one wants high inflation and the only way to stop it is by slowing the economy and reducing demand so prices fall back.

Russia’s invasion of Ukraine has also contributed. The associated sharp reduction in energy supplies into Europe has caused a jump in energy costs. Europe’s premature closure of coal fired power stations has also contributed.

The election of a new Prime Minister and Treasurer in Britain who immediately proposed major unfunded tax cuts and deregulation also caused instability in financial markets briefly. That has now settled down with market interest rates declining.

What else is there to worry about? Could Russian President Putin use nuclear weapons as he becomes more cornered. China’s influence in the Pacific is a concern. Could it invade Taiwan?

Fortunately, there are early signs that inflation may be starting to ease in some countries. In both Britain and the US it fell slightly in the year to September compared to August. Inflation in Canada fell from 7.6 to 7.0 per cent.

The global oil price, a major input cost, is down from US$118 in June to US$84 now. Surveys of factory input costs in the US show they are declining. Last year there were severe shortages of computer chips. Now manufacturers say they have mostly caught up production and forward orders are weak. 

The Chinese factories are back at work and catching up the backlog of orders. Delays in delivery of goods are shorter. That applies to building materials in Australia for example.  

Inflation in Australia was 6.1 per cent in the year to June. It is extremely unlikely to be that high for the next year because labour costs are a major input to the production of most goods and services, and wages aren’t rising that fast.

Normality will return in time. The high interest rates are causing pain for those with large mortgages and debts. House prices are falling. The next three months are unpredictable. Things could get worse before they get better.

However once inflation starts to fall interest rates will also peak. That will trigger a strong share market rebound. The next year or two are likely to produce high investment returns. The current low prices provide great buying opportunities for long term investors.