After a strong start to 2022, markets globally have become volatile with inflation rising above expectations, leading to the potential for earlier interest rate rises. Unprofitable businesses feel the greatest impact of rising interest rates on their valuations, as their cost of funding rises. This is not to say that quality profitable (defensive) businesses will not be impacted by capital movements out of equities, just not to the same extent as many high-growth companies.
As outlined below, the Goldman Sachs Non-Profitable Tech index significantly underperformed the broader market in 2021.
The start of 2022 has seen a continuation of this. The market is forward looking, factoring in several interest rate rises this year. The job of central banks is being done prior to any action being taken. The threat of a Russian invasion of Ukraine is also impacting markets and could have a significant impact on energy prices in particular.
However, the underlying economy is booming, giving rise to lower unemployment, increasing wages and inflation. The market has historically done well during periods of strong economic growth, as inflation and interest rates start rising. More and more pundits are predicting the downturn, after the fact. Others have been predicting it for years, resulting in significant gains being unrealised (opportunity cost).
“Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.” Peter Lynch.
Given short-term market movements are difficult to predict, a long-term view and a high-quality portfolio is critical to financial survival. The fundamentals of many businesses remain very stable, although the share prices are becoming increasingly volatile. Perhaps an opportunity.