The Year Ahead: The pandemic has not yet run its course.....

One of the hardest aspects about managing investments is being able to look to the future, cut through all the background noise and day-to-date headlines, and hopefully somehow see round corners to understand what lies ahead.

Never has that been as hard as it is this year. But as the old joke goes, how do you eat an elephant, one mouthful at a time, lets work through the issues, one by one.

While the end of formal lock downs, makes it tempting to think the pandemic is behind us, sadly this is not the case. Even with high vaccination rates as here in Australia, thousands are still succumbing to the virus, which in turn is causing large holes in the workforce through absenteeism.

The impact of this is everywhere, from cafes closing because they can’t find staff or staff are ill through to truck drivers being too sick to maintain supplies to international ports being log jammed as a result of absenteeism.

This is causing shortages throughout the economies worldwide and with this, price rises across the board, as manufacturers and suppliers struggling to keep up with demand.

Inflation has clearly jumped out of the box and is threatening to prompt an increase in interest rates in Western economies. The current interest rate in the US is 6.8 per cent, its highest since 1982 and is threatening to go even higher.

Normally, this would prompt the Federal Reserve to lift interest rates, but with pandemic numbers still high and the US economy on something of a knife edge, this is no way near as certain as it normally would be.

Nonetheless, just the prospect of higher US interest rates will be a dampener on economic activity around the world, a situation made worse by the ongoing impact of the pandemic on supply lines and trade activity.

In Australia, the inflation rate has reached 3.5 per cent and in contrast to the US, this is almost certain to prompt an increase in interest rates sometime in the next 6 months by the Reserve Bank.

Already local consumers are feeling this through higher fuel costs and increased prices for foodstuff and other consumer goods however, this is nothing compared to the impact it is having on businesses.

In its latest quarterly report, the giant miner, Fortesque Metal reported that it was facing fuel hikes and other cost increases of some 20 per cent during the next twelve months.

Against all this, the Commonwealth Bank estimates there is some $260 billion in Australian savings accounts due largely to the fact that most households during lock down have struggled to spend their savings.

This has resulted with some of Australia’s largest retailers, both on-line and in physical premises, posting some of the best years ever during the pandemic.

Against this, some companies, particularly those operating in hospitality, tourism and fitness, will in the absence of continued government support, will struggle and not survive the next twelve months.

So the verdict of all this is that we are not out of pandemic created troubled water and it will pay to be more rather than less conservative.

Please continue to read the four other articles posted this month.