OPINION: The last three years have been kind to retail investors, at least those investing in US shares.
The S&P 500 (the top 500 companies in the US, made up of the likes of Apple and Amazon) finished up 29 per cent in 2019, 16 per cent in 2020, and 27 per cent in 2021. For comparison, in an average year, the S&P would be up 7 per cent to 9 per cent.
Many first-time investors who primarily focused on US-backed stocks and joined in during the bull runs will not have experienced some of the turbulence the market brings.
And with Covid-19 still ever-present on our shores and abroad, here are three trends beginner investors should be aware of for 2022.
Rising interest rates both in the US and in NZ
The correlation between the stock market and interest rates historically has shown that stocks perform better when rates are low.
For those unfamiliar with the concept, interest rates are the amount a borrower, such as a business needing a loan, has to pay back on top of their loan.
Low-interest rates are good for business, consumers and, theoretically, stocks.
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In the US, the Fed’s zero interest rate policy (ZIPR) is unlikely to last this year, meaning investors are asked to be wary of interest rate hikes.
Predictions by CME show a minimum of two rate increases, the first hike in four years.
The reason higher interest rates aren’t good for business is that they lead to increased business expenses and decrease borrowing among consumers, possibly resulting in lower profit margins.
Low margins mean companies aren’t meeting expected targets set by analysts, and essentially “miss” their expected earnings.
There’s a saying on Wall Street “don’t fight the Fed” – if the Fed increases interest rates, stocks aren’t going to be too happy. As a beginner retail investor, fighting the Fed is most likely not on your to-do list.
Investors confidence might be shaky
Gone are the days of assuming Covid-19 would last a year or two. Novice investors may be expecting the market to rally further in 2022 as seen in the previous years. However, the post-Covid market rally has already arrived and gains to be expected from a market recovery have been priced in.
In simple terms, this means that it is very unlikely that we will see what happened after March 2020 happen again on the same scale.
Instead, investors are now more cautious around the effects of Covid and its ever-changing variants. Retail and institutional investors alike do not confidently believe the pandemic is over. While Omicron may be less deadly, the World Health Organisation released a statement calling for governments to uphold the same levels of caution.
The issue surrounding Covid itself is the effect it’s still having on supply chains, shipping disruptions, and energy prices, which push up the costs of doing business.
Semiconductor chips, used in a wide variety of elements such as batteries, have still not recovered from their 2020 shortage and will continue to slow down production. Automobile and technology companies are likely to be most affected by this. Volkswagen officials, for example, has indicated its supply chain issues that caused a 4.5 per cent drop in production in 2021 would continue into this year.
First-time digital investors pouring into the market
With more than 1.5 million Kiwis investing on micro-investing platforms during the pandemic, 2022 is set to see another increase in digital retail investors.
We expect this to be pushed further with the recent Credit Contract and Consumer Finance Act (CCCFA) changes that came into effect on December 1. The controversial CCCFA is designed to protect consumers from taking upon too much debt, especially in the housing market.
However, new guidelines have also made it difficult for even those making six-figure incomes to access mortgages. New Zealand’s love affair with real estate isn’t going anywhere. But with the additional barrier to many first-home buyers, and with the accessibility of micro-investing platforms like Sharesies and Hatch, young Kiwis who have again been locked out of the housing market are turning to alternative means of investing, like the stock market.
About 140 houses sold for $2 million or more in Wellington City throughout 2021, according to data from homes.co.nz.
This phenomenon is not only occurring in New Zealand, but in the US and Canada too, where average house prices are becoming unaffordable for the everyday first-home buyer.
For young Kiwis, housing has never been more unaffordable and the stock market has never been easier to join, pushing more and more Kiwis to consider buying shares.
After all, all they need is a phone and an internet connection to get started.
Simran Kaur founded the Girls That Invest pocast with Sonya Gupthan and aims to break down the basics of investing for a younger generation and particularly women and minorities around the world.