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4 Feb 2022 - Hedge Clippings |04 February 2022



Hedge Clippings | Friday, 04 February 2022

After threatening to end in "correction territory" (down 10%) in January, the ASX200 clawed back some of its previous three weeks' losses, but was still down 6.35% by the end of the month, making it four negative months out of the last five. On a rolling 12 month basis the index's return has dipped below 10% (-9.44%) for the first time since February 2021.

Across in the USA, the S&P500 fared slightly better in January, recording a loss of 5.25%, however it is still tracking at a rolling 12 month return of just over 21%. Most, if not all readers of Hedge Clippings, would be well aware of the change in market direction and sentiment, even if they were not across the exact percentage falls or 12 month returns, so what is the point we are trying to make?

Simply this: Given the potential clouds and headwinds facing the world, and in turn financial markets, January's falls seem "relatively" innocuous, unless of course they are a pointer of things to come. We have previously mentioned the geo-political risk of an outbreak of hostilities between Russia and Ukraine, or worse if NATO became involved. China seems to have reduced its "wolf warrior" stance in the lead up to the Winter Olympics, but we strongly suspect that's only temporary, and the battle - at least verbally - over Taiwan will resume not long after the closing ceremony.

No one, not even Philip Lowe, the Governor of the RBA, thinks interest rates will be where they are now by the end of the year, even if he and his board surprised markets by not moving rates upwards earlier this week in the face of significantly higher inflation - both here and overseas. And the government is basking in unemployment levels of just over 4%, with expectations (hopes?) that it will drop below 4 in the months leading up to the election. Whilst COVID induced labour shortages may be the cause, and therefore low unemployment is likely to be temporary, it is likely to drive up labour costs - if it hasn't already.  Just ask anyone who has tried to hire a builder or tradie (if they can find one) recently.

Maybe Hedge Clippings is being overly negative, or we're becoming pessimistic in our old age, or maybe it's a reflection that in spite of the problems associated with COVID over the past 2 years, many sections of the economy - financial markets in particular - have had a golden run for a long, long time. And while we understand that markets are not the economyfor many - investors and fund managers in particular - they tend to dominate thinking.

Taking the pulse of a range of fund managers suggests that while the "easy" returns may have passed for the time being, there's still a strong feeling that, for stock pickers at least, opportunities will always exist for the smart and nimble, they may just be harder to find. Maybe, as Phil King from Regal suggested earlier in the week, these markets create opportunities for long/short managers that have been hard to find in strongly rising markets.

It's certainly going to be harder, but the market's 12 month rolling returns, which ranged from 27% to 37% for much of last year, are unlikely to be on offer in 2022.

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