When spare capacity is reduced to a low enough level, it tends to force upward pressure on wage growth and inflation, and this is exactly what the RBA will be wanting to see before it considers raising interest rates. However, with JobKeeper terminating at the end of March it’s expected that up to 150,000 jobs might soon be lost. Meaning that this downward trend in unemployment may begin to track sideways, at least for the next few months.
Family office sting
Family office firm, Archegos Capital Management sent shock waves through the market during March, after they were forced to sell down highly leveraged positions worth billions of dollars. In the aftermath, Archegos is said to have lost approximately $US20 billion dollars in just a few days. While the firm’s lenders, Credit Suisse and Nomura, could be facing losses of $US5 billion.
The case study highlights several underlying themes that are present in today’s market environment. Firstly, with interest rates at record lows, there is an increasing temptation for investors to take on greater risk in pursuit of higher returns. The return for holding cash is negligible today, while borrowing rates have never been cheaper. The enticement for investors is to borrow, or leverage up, and put their money into growth assets, so long as they can afford the additional risk.
This leads us to the second key takeaway, being the absence of prudent risk management by all parties involved. It is absolutely essential that all investors, big or small, make appropriate risk assessments when formulating their investment plans. At a minimum, the following two points should always be addressed:
- How much risk is required to achieve the desired return; and
- How much risk can you afford, should market conditions become unfavourable.
As with the GameStop episode earlier this year, the fall of Archegos will certainly cause some big losses for individuals, however the impact on the broader market should be less significant. As always, investors can best limit their exposures to such instances by remaining diversified across multiple regions and sectors, with an appropriate allocation to both growth and defensive assets.
If you enjoyed this update, view our February Market Update.