Overnight, the US stock market capitulated, particularly in the technology sector, with the NASDAQ down 4.6% and more than 30% since the start of the year.

In response, the S&P/ASX200 opened more than 4% lower, with the hardest hit being the real estate and technology sectors.

Building materials supplier James Hardie Industries plc (ASX:JHX) opened 7% lower.

Real estate investment trust Goodman Group (ASX:GMG) opened 6% lower.

Wisetech Global Ltd (ASX:WTC), which derives most of its revenue from global trading, was down 9% at the open.

TechnologyOne Limited (ASX:TNE), which develops and sells enterprise software globally, was down 7%.

Central banks

Recent record inflation footprints have triggered central bank toolbox responses with rapid hikes in base interest rates to keep inflation under control.

Some might argue that base interest rates are just getting back to multi-year averages, but this time it’s different, especially for Australia.

Australian housing values

According to Lazard Asset Management, the value of Australian residential land is at an all-time high as a percentage of GDP. It mirrors that of Japan before the asset value crash of 1991 that precipitated the “lost decade”.

This increased proportion of capital tied up in the property means that the average mortgage owner without a fixed rate is more sensitive to changes in lending rates than in the past.

Inflation and delayed returns

In an inflationary environment, when prices rise, a dollar today will buy more of a good or service than the same dollar will in the future.

The growing technology sector tends to defer cash flow to investors in favor of product development and marketing to gain market share.

Capital aggregation and allocation rather than shareholder payouts in the form of dividends and redemptions compounds the impact of inflation on potential shareholder returns. This makes the technology sector particularly sensitive to changes in the value of future dollars, ie inflation.

Non-leased residential real estate investing works in a similar way in that the return is deferred until the sale. Combine the decline in the future value of the dollar with rising borrowing costs, and house prices start to suffer.

When asset prices take a hit, Australia’s large service economy will suffer and there will be very few safe havens.

Investor answers and where to put your money

Resource companies continue to do well in inflationary environments.

With dividend-paying companies like Woodside Energy Group Ltd (ASX:WDS), cash generated by the business is returned to shareholders at regular intervals rather than kept on the balance sheet, mitigating the impact of inflation on return on investment .

Santos Limited (ASX:STO) is down 4% at the open, up 30% on the year, and supported by international energy prices. WDS is up 51% since the start of the year.

Gold is traditionally a good hedge against inflation when real rates (basic inflation-adjusted loans) fall.

Central banks are just keeping pace, but there is a risk for economic growth of raising rates too quickly, which could force them to take a more dovish approach. In this case, real rates will fall and gold will appreciate further.

Newcrest Mining Ltd (ASX:NCM) is down 9% year-to-date and a relatively modest 2% at the open.

Opportunity

Internationally post-COVID, there is heightened sensitivity to market-embedded interest rates generated by larger government and individual balance sheets.

We can expect market volatility to continue for the foreseeable future.

On the other side of the coin, volatility offers the rational investor attractive buying opportunities.