Hope for investors scared by share and crypto crashes

By Paul Hemsley

May 19 2022
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As share markets and cryptocurrency take a beating following the tightening of monetary policy across the world, investors are contemplating their next move.

When considering the consequences of potential economic pain resulting from interest rate hikes from the Reserve Bank of Australia (RBA) or the United States Federal Reserve to reduce inflation, the impact on shares and cryptocurrencies has been hard felt by investors worrying about the state of their portfolios.

But AMP chief economist Dr Shane Oliver offered a more sobering outlook to contrast what he referred to as “doom and gloom” in the news media, saying that share market pullbacks are “healthy and normal”.

To calm the anxieties likely felt by investors following sharp falls in their positions, Dr Oliver’s latest Insights report from AMP Capital presented a realistic view of the present situation, with key points for investors to bear in mind.

“In the absence of a recession share market falls may be limited; it’s very hard to time market moves and selling shares after a fall locks in a loss; share pullbacks provide opportunities for investors to buy them more cheaply; Australian shares still offer an attractive income flow relative to bank deposits,” Dr Oliver said.

He also warned that to avoid getting thrown off a long-term investment strategy, “it’s best to turn down the noise around all the negative news flow”.

“Sharp share market falls are stressful for investors as no one likes to see their investments fall in value,” Dr Oliver said.

Regarding Australian shares, he said they are vulnerable to further falls in the short term along with global shares.

“However, as they have been relative outperformers through the decline in share markets so far and this is also evident year to date where global shares are down 13 per cent and Australian shares are down 4 per cent,” Dr Oliver said.

He said this reflects their exposure to strong commodity prices and low exposure to tech stocks.

Although he warned that the latest COVID lockdowns in China may weigh in the short term, he believes Australian shares are likely to continue to outperform over the medium term as the commodity super cycle continues.

"This comes on the back of constrained supply reflecting low levels of resource investment, decarbonisation and geopolitical tensions - and as higher bond yields compared to the pre-COVID era weigh on tech stocks," he said.

As for the highly publicised cryptocurrency “meltdown” and whether it will “de-rail things”, Dr Oliver noted that cryptocurrencies and tech stocks are suffering as a result of easy money being reversed.

“The risks were highlighted in the past week with the collapse of TerraUSD, an algorithmic stablecoin meant to stay at US$1, with a flow on to demand for other cryptos, including Bitcoin,” Dr Oliver said.

“Notwithstanding short-term bounces, further downside is a risk if falls feed on themselves and the speculative mania in crypto unwinds, leading to yet another 80 per cent top to bottom fall,” Dr Oliver said.

And he warned that a collapse now could have a more lasting impact on investor interest in cryptocurrency than in the past when it was less “mainstream” as it depends on bringing in more investors to keep it moving forward.

“Particularly, given that Bitcoin has so far offered little hedge against inflation over the last year,” he said.

But on a more hopeful note for the broader financial system and economy, he said a crypto crash poses a risk but “it’s unlikely to be another sub-prime/2008 US housing crisis”.

He said banking system exposure to crypto is limited and the exposure of the wider public is still small – “unlike it was to US housing”.

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