• Pressure put on global economies since the war in Ukraine started a root cause of inflation
  • Vanguard analysis shows investors who stay the course instead of cashing out during volatility are rewarded
  • Energy stocks an inflation hedge over the past year as rising oil prices help boost their earnings

Digesting financial news in the past few days has probably made many investors feel a little woozy, unless of course they invested in Brisbane-based ResApp Health (ASX:RAP).

There was $82 billion wiped from the ASX on Tuesday in its worst session since March 2020. Sell-offs extended into Wednesday as the market entered correction territory following broad Wall Street falls with investors fearing growing inflation, hawkish central banks and slowing economic growth.

But as Stockhead’s Christian Edwards reported, the smartphone-based respiratory diagnostic maker emerged “green and preposterous” from Tuesday’s chaos up 50% after global pharmaceutical giant Pfizer supercharged its broadly supported original offer for 100% of ResApp by as much as $78m, with the proviso that RAP can reproduce the promise of its Covid-19 screening cough results.

So, what about Australia’s ETF industry? The ETF industry has boomed in the past decade with a report by online investment advisor Stockspot, which specialises in ETFs, showing a record $23 billion has flowed into ETFs in Australia in the past year.

According to BetaShares May ETF review, market declines caused the Australian ETF industry to fall in value for the month. Industry assets under management (AUM) fell 1.6% or $2.2 billion month on month, ending May at $131.3 billion.

However, even with Australian and global sharemarkets falling, ETF investors continued to invest, with net flows of $1.3bn for May.

What do Australia’s big ETF players in the sector have to say to investors during these challenging times?

1 – Understand the causes

While we don’t like to point fingers, ETF Securities head of distribution and marketing Kanish Chugh said we can’t dismiss the pressure put on global economies since the war in Ukraine started in February.

“The root cause of escalating inflation is the Russian war in Ukraine with the two countries some of the world’s biggest suppliers of commodities, including oil and wheat,” Chugh said.

“The war has caused Russia to be sanctioned by the West, but equally importantly it has caused Russia to garrison its economy with an export ban.

“Thanks to the export ban, Russian wheat has been removed from the global supply cycle, causing food prices to rise.”

Russia’s export ban on wheat in 2010 is cited as one of the primary causes of the Arab Spring in 2011. Meanwhile, sanctions on Russia have seen its oil removed from Western economies, causing the oil price to rise.

“A rising oil price causes the cost of transport to increase, as Australians have doubtless noticed when filling their cars with petrol,” Chugh said.

“Higher oil prices create higher prices on supermarket shelves, as supermarket shelf prices always ultimately include transport costs.

“The volatility we’re seeing in asset prices reflects fears that higher food prices will trigger not only interest rate rises, but also political unrest.”

BetaShares chief economist David Bassanese also told Stockhead the war in Ukraine has added to global inflation pressures due to the associated disruption to global food and energy supplies.

“With the world not wanting to buy Russian oil and gas, it has added to demand for non-Russia sources of supply which have pushed up prices,” Bassanese said.

“Similarly, both Russia and Ukraine are major agricultural exporters, especially in the areas of wheat, fertilisers and seed oils. Disruptions to supply of these goods from both countries has contributed to an increase in global food prices.”

2 – Block out the noise focus on long-term goals

Vanguard Australia Head of Capital Markets Minh Tieu told Stockhead there is no doubt that recent market volatility has investors on edge and wondering what to do next.

“While it is natural to be concerned, it is also crucial to tune out the noise and stay focused on your long-term goals,” Tieu said.

“Vanguard analysis found that investors who stay the course instead of cashing out during periods of volatility are rewarded for their discipline when markets start to rise.”

He said the below graph is an important lesson on investor behaviour, showing trajectory of a portfolio based on four different investment decisions taken at the end of December 2018 when the market experienced a downturn.

Source: Vanguard US calculations, based on data from FactSet, as of February 28, 2019.

While the investor would have lost 5.7% since 1 November 2018, by staying the course and not selling at the market low, sticking to their asset allocation meant the portfolio was returning 4.2% just two months later.

If the investor had cashed out in December instead, reinvesting just a few days later, the value of their portfolio is still not as high as if they had remained. Cashing out in December would mean the portfolio is nearly $100,000 less than what it could have been by February 2019.

It might be hard to tune out the short-term market noise but consider that exiting the share market now means locking in your losses permanently.

3 – Look at longer term trends

Tieu said investors could also look at longer term trends to quell their anxieties. He said it can be easy to dismiss long-term trajectory of the share market during a period of volatility but if you’re invested in equities for the long term, know that you have time on your side.

“Take for instance the ASX which has increased 10% annually on average – this upward trend occurs because businesses generally grow as a result of innovation and investment, and become more profitable over time,” he said.

“As a shareholder, whether through a broadly diversified ETF or direct shares, an investor naturally partakes in the growth of profit, cash flows and positive business results. ”

Bassanese agrees, saying in the current climate, to the extent possible, investors should continue to take a long-term view when it comes to wealth creation.

“Current market conditions are a timely reminder that equity markets can be volatile and go through cycles,” he said.

“Accordingly, investors should have a clear strategy when it comes to building wealth, taking on board their own risk tolerance with regard to short-run market volatility.

“Important in this regard is diversification, keeping investment costs as low as possible, and maintaining an appropriate balance of growth and defensive assets.”

Tieu said having a strategy in place and being disciplined in staying the course is key to achieving your long-term goals.

“It helps you avoid temptations like chasing performance, market timing, or reacting emotionally when the market dips,” he said.

4 – Consider exposures to protect against inflation

Ever had that dream where you are naked in public and there’s nowhere to hide? Well, these market conditions leave us all a bit exposed.

“In today’s late cycle environment of rising bond yields and weaker equity prices, there are fewer places to hide – we’re at a stage of the cycle where cash is king,” Bassanese said.

“That said, I think bond markets now have very aggressive policy tightening priced in and are starting to look good value – I think economic growth will slow by enough well before either the Federal Reserve or the RBA pushes rates up to anywhere near the 3 to 4% levels markets currently fear they will go.”

He said energy stocks have been the best inflation hedge over the past year as rising oil prices have helped boost their earnings.

“So to the extent oil prices stay high, even if they don’t rise a lot further, energy companies such as through the BetaShares Global Energy Producers ETF (ASX: FUEL) should continue to do relatively well.

“This is also true generally for Australian resource companies, given the still high price of iron ore, which diversified exposure is possible through the BetaShares Australian Resources Sector ETF (ASX:QRE).”

Bassanese said as economic growth slows, however, inflation should start to ease and bond yields level out.

“Once inflation is considered under better control, we could see a return to investor preference for growth/technology stocks, such as the BetaShares NASDAQ 100 ETF (ASX: NDQ),” he said.


5 – Look for silver linings

Chugh said there are silver linings to the correction we are seeing in markets with the most obvious that young Australians, who have longer time horizons and greater risk tolerance, are being given a more attractive entry point to all asset classes – and not just stocks.

“We often hear that high asset prices – especially house prices – risk freezing out a generation from wealth accumulation but young Australians can use corrections and bear markets as opportunities to buy in cheaply,” he said.

“During the Covid-19 selloff in March 2020 we saw record numbers of young Australians begin to buy stocks and ETFs.”

Another silver lining is that it’s highlighting the role that diversification can play in supporting portfolios. He said commodities like gold have strongly outperformed stocks the past 12 months, as investors have flown to safety.

“Most investors know the importance of diversification but like other healthy habits – exercise, dieting, calling their grandmothers – they tend to put it off until circumstances for a change of habit,” he said.

“And current circumstances are helping create a change of habit.”


6 – Try not to worry about the ‘R’ word

There has been a lot of talk about recessions and stagflation globally but is Australia really at risk? Last quote for this article goes to experienced economist Bassanese who said while the risk of a US recession is building, the local outlook remains more encouraging.

“One major difference between the US and Australia is that wage growth, at least as officially measured, remains more contained locally, meaning the RBA should not need to slam on the brakes too hard and drive up unemployment,” he said.