07 Dec

The more things change…

Like many of you, three weeks from now, I’ll be celebrating Christmas with friends and family, and looking forward to another exciting year in 2023.

Given the festivities to come, December is the perfect time of year to take stock of where things sit in investment markets, and more importantly, in our own portfolios.

By doing so, we can work out how best to position ourselves for the challenges, and just as, if even not more importantly, the opportunities that the new year will bring.

In our latest market update, we do just that, by reviewing the year that was, which helps frame what next year may bring.

We also consider the factors that have made pink diamonds the market leading performer in the last couple of years, and why they remain as strong as ever.

The year that was

When we look back at 2022, there are several key developments that will be worth remembering. We’ve listed them below, in no particular order, though we’ve saved the best for last.

  • Interest rates can and do rise:For most of the last fifteen years – interest rates have been at or near zero across the developed world. Barely a year ago, central banks were saying they thought rates would stay near zero until the middle of the 2020s at the least. Instead they’ve shot up this year with a vengeance, with the Reserve Bank of Australia making their 8th straight increase in December, hiking the cash rate by 0.25% to 3.10%. Rates can go up. Not borrowing too much or relying on assets that only do well when others go ever further into debt matters again.
  • Inflation is back:The main reason interest rates have skyrocketed higher in 2022 is the return of inflation, which has risen to multi-decade highs across the world, including in Australia. At one point earlier this year, it rose to more than 9% in the United States, and it’s gone above or near 10% in other parts of the world like the United Kingdom and Europe. For the first time in a generation, there is a cost of living crisis.
  • Stocks are volatile:After a brutal pullback when the COVID pandemic first hit, stocks soared, as cheap money and government handouts encouraged investors to pile into risky assets.

    Hardly anyone thought the market would fall. This year has been a rude awakening, with global equities down across the board.

    They could fall a lot further in 2023.

  • Property doesn’t always go up:Property prices soared during the COVID pandemic, with some measures suggesting Australian residential real estate rose by 30% across the nation.

    Given property was already expensive heading into the pandemic, this surge was always somewhat perverse, with the circa 10% fall that we have seen in the final few months of 2022 likely the start of a multi-year corrective cycle in housing prices.

    In real terms, prices are likely to fall by 20-30% at a minimum, encouraging investors to seek alternative ways to both build and protect wealth.

Last but by no means least, pink diamonds continue to lead the way, not only holding their value in 2022 while most other asset classes went backwards, but continuing to increase strongly.

That strong performance has led to an influx of new buyers accessing this asset class, both globally and in Australia, with Australian Diamond Portfolio welcoming many new clients over the past twelve months.

Combine all of the above, and there is little doubt 2022 will be remembered as a momentous year for markets, and for investors.

And while it has been mostly bad news for investors in traditional assets, there have been some good news stories, with no asset class shining brighter than pink diamonds.

Pink diamonds are just getting started

There is no doubt the last two and a half years have seen exceptional price growth in the pink diamond market, with our very own Australian Diamond Portfolio Pink Diamond Index (ADPPDI) suggesting the asset class a whole has risen by close to 60% over this time period.

Two primary factors have driven this market leading growth.

On the supply side, the closure of the Argyle mine in late 2020 made an already rare asset even scarcer, with up to 90% of total global supply on an annual basis removed from the market, never to return.

The second factor was the onset of the COVID pandemic, which led to trillions of dollars of money printed by central banks, and trillions of dollars of additional government debt. This conspired to see demand for most hard assets, including pink diamonds, soar to new heights.

As we head into 2023, these drivers of pink diamond demand are only likely to strengthen.

The supply side remains as tight as ever, with no new mine discoveries of any note, let alone something being put into production or even likely to on any meaningful scale.

This lack of supply has the potential to be very positive for pink diamond prices in 2023 and beyond.

On the demand side, pink diamonds are likely to continue to see support from investors worldwide. This is primarily due to two factors, the first of which is that they are beautiful and desirable in their own right.

The second factor is more investment centric, with stubbornly high inflation, higher interest rates, a volatile stock market, falling residential property prices and the increased chance of a recession all supporting the investment case for pink diamonds as a portfolio diversifier, an inflation hedge and a store of wealth.

Pink diamonds are also likely to get a continued boost from the favourable media attention they are generating, both in Australia and overseas.

That favourable coverage continued last week with an article in the South China Morning Post (SCMP) that reaffirmed both the supply and demand dynamics we highlighted above.

The SCMP article also noted that pink diamonds make excellent investments, and that prices for larger pink diamonds have increased exponentially over the last decade.

There are few asset classes that offer the same kind of potential benefits to investors as pink diamonds may, especially given the broader economic, political and investment climate that we will all have to navigate in the year to come.

In that sense, while there are plenty of things changing, the strong investment case for pink diamonds remains the same!

As always, we hope you’ve enjoyed this week’s edition of “In the Loupe” and we look forward to any questions or comments you may have.


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