Market Watch: The big correction – where has the smart money gone?


The past month has seen hundreds of billions of dollars worth of market value wiped out as global markets moved into correction territory.

High-flying tech stocks have been some of the hardest hit, with Meta (formerly Facebook)seeing its value fall 27 per cent in just one trading session.

With inflation concerns and interest rate rises highly anticipated, why now?

And where has all the money gone?

While it often seems like value disappearing, what we are seeing this time – and several times through the pandemic – was investors switching in and out of asset classes, said Pie Funds chief executive Mike Taylor.

“What we’re seeing this year is that another rotation has occurred, out of the high-growth tech names into the likes of energy and financials,” he said.

Meta’s huge fall last week was partly to do with more specific issues.

“That’s because user growth has slowed and it’s the first time ever that Facebook’s had a decline in users,” Taylor said.

“But overall what tends to happen is, when interest rates rise, tech stocks suffer.

“The businesses that are burning cash, not making profits now but are expected to make profits in the future – when rates go up the value of those companies goes down.”

While market watchers had been watching inflation and anticipating rate rises for a long time there had been a significant shift of outlook in recent weeks.

“Through 2021 the US Federal Reserve had been quite convincing in its message that they believed inflation would be transitory,” Taylor said.

“Initially they didn’t talk about rate rises until 2024, then it was 2023. Then as we came into this year and had an inflation print of 7 per cent [US], it was suddenly: hang on we’re going to possibly have five rate rises this year.”

On top of that they were forging ahead with tapering of the quantitative easing programme and plans to shrink its balance sheet.

“So that was three big’wow’ moments for markets that they had to adapt to and adjust to in a couple of weeks.”

The risk for central banks was that as they lifted rates economic growth may start to slow.

Consumer-led growth was already coming under pressure from inflation and higher prices for things like petrol.

Ideally when economies slow central banks start to ease rates.

“So it will be interesting this year to see how they address that,” Taylor said.

“We may have a situation where inflation is still high and growth is slowing down.”

If they stay completely focused on inflation they could potentially tip the economy into recession “which is what happened a number of times when they tried to fight inflation in the early 80s”.

Issues like the tension between Russia and Nato over Ukraine were not helping the situation and were adding to energy price inflation.

Closed borders, especially in New Zealand, were creating labour shortages and adding to wage inflation.

It all added up to a very difficult outlook for 2022, Taylor said.

But there was some cause for hope in that a few positive events could cause the pressure to ease.

If the border tension in the Ukraine was solved diplomatically and if Omicron proved to be the last serious variant of the pandemic, then things would start to open up again in the Northern Hemisphere.

The return of travel and opening of borders would start to ease labour and transport costs.

Regardless, investors should expect to see volatility in markets this year, he said.

“Probably rate rises are going to continue – and if they don’t continue that means something has gone horribly wrong in terms of the economy.”

– The Market Watch video show is produced in partnership with Pie Funds.

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