If you’re an investor, or looking to become one in 2023, Dean Anderson from Kernel Wealth sheds some light on what that might look like after the highs and lows of last year.
Following the dizzying highs of 2021 when stocks skyrocketed to record-setting gains, 2022 proved to be a much more tumultuous time for investors as inflation, war and fears of recession made for a volatile year of bruising losses.
As Wall Street looks to bounce back from its worst year in more than a decade and interest rates continue to go up, where to for investors from here? Kernel chief executive Dean Anderson gives his two cents on what we might expect to see.
Having just come off a pretty action-packed year from an investing point-of-view, how would you describe 2022?
There was quite a lot of activity throughout the year and I think a lot of the things that happened were things many weren’t familiar with – a tense geopolitical situation, record rising interest rates, and inflation levels people hadn’t seen in a generation, for example. So there were a lot of shocks to the system that we’d never experienced before, which I think created quite a bit of change and uncertainty.
Interestingly, although the things that occurred last year were pretty dramatic, I don’t think there was ever really a sense of major panic. People weren’t selling all their investments and putting their savings under the mattress which, hopefully, is reflective of the improving financial literacy here in New Zealand. More and more people now understand that things happen in the short term that are uncontrollable. Although on the other hand, it may just be driven by a sense of “well, everything’s buggered and I can’t do much about it so I just won’t make any decisions”.
What are some events from 2022 that stand out to you when it comes to having an impact on the state of investing?
The major impact that really set the year up was the geopolitical situation with Russia and Ukraine. The other big impact was interest rates rising dramatically, going from basically close to zero to now over 4%. That’s a big shock in a short period of time, and most of the impact from that still hasn’t been felt.
One thing to note is that New Zealand investors were actually a little bit protected from the true severity of what happened globally due to some very significant currency volatility. So the US dollar strengthened from the start of the year until about September by about 20%, and for a New Zealand investor that meant that while the value of the underlying shares was down by more than 20-30%, it was dampened because the currency had changed so they didn’t see their portfolio drop as much.
Looking to the new year, what do you think 2023 will have in store?
I think one thing we’ve got to follow closely are the flow on effects of rising interest rates. There’s all likelihood that interest rates are going to go up again next month and debate remains as to whether it’s going to be 0.5% or 0.75%. But these rising rates are going to impact people, particularly those with mortgages because all of a sudden people are now having to pay thousands more per month to maintain their mortgage repayments. That, in turn, is going to have a squeeze on our economy and on people’s ability to invest.
There’s that old saying that “cash is king”, and I think that’s really going to hold true this year. People are going to need to be very conscious of how they’re spending, making sure they’re spending less than they earn and that they’re prepared for rising costs. Equally, if they have cash, it also presents some opportunities for people to set up a regular investment plan or invest more in things like shares because the property and share markets have fallen in value.
Are there any investing trends that you think we’ll see this year?
I think the big thing we’ll see is the return of ESG (environmental, social, and governance) investing. This was a rising trend until 2022 when it went on the backburner when the Ukraine invasion occurred which created major shocks for oil and gas. But I think this year, we’re going to see values-based investing return as consumers increasingly demand more socially responsible and sustainable products. Consumers want to be engaged with companies whose brand values they relate to and want to support, equally they want to invest in a way that considers the climate and wider society.
Particularly in New Zealand, I think we’ll see this a lot because there are also some regulatory changes happening this year that will create greater emphasis on ESG investing. From April 1, a law will come into effect making climate-related disclosures mandatory for some large financial market participants. That means fund managers, banks, insurance companies, and companies that sit on our stock exchange will have to start considering their long term climate impact, how they’re going to report on it, and how they’re going to manage the risks. And it’s not a light regulation: it’s actually quite significant, with non-complying companies looking at up to five years jail time for directors and up to $5 million in fines.
Another theme is the return of more investable asset classes. A couple of years ago, the only real option most people had to invest in were shares. There weren’t really any alternatives because you earned almost nothing by having your money in a term deposit or savings account. Now, with interest rates at 4-5%, you’ve got real options again. So I think people will have more investing choices this year, which is great if you’re someone who’s maybe close to retirement or preparing to buy a house seeing as you don’t want to be investing in a lot of shares.
Lastly, after having a pretty tough time in 2022, what would you say to investors going into the new year?
It’s impossible to make predictions about what’s going to happen tomorrow, so for most investors, focusing on the things that are controllable is still the number one thing to think about. If you’ve got disposable income, focusing on simple and regular investing, keeping costs low and taking a long term view will hold true no matter what the year brings.
The irony with investing is that good investing is kind of the opposite of everything else we’re taught in life. Normally we’re told that the harder you work, the greater the reward. And equally there’s this idea that the more you pay, the greater the value (ie: the more expensive the car or house, the better quality it is). But with investing, it’s the complete opposite: the less you do and the lower your fees, the better your chances of having positive long term outcomes.
So for those who’ve stayed the course, I’d say congratulations. It’s not easy seeing your hard-earned money go down. But I think those who’ve stuck through are really setting themselves up for the future because, although there’s going to be more uncertainty this year, things will change at some point and the sun will eventually shine again.
This interview has been edited for length and clarity.