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Investors are always cautioned to be prepared for so-called Black Swan events – events so rare they take everyone by surprise. It is fair to say nobody anticipated what 2020 had in store.
Just as we were recovering from catastrophic bushfires and drought, the COVID-19 Black Swan circled the globe. By the end of the year, 85 million people had been infected and 1.85 million had died.
And yet… As we look back over the year that was, challenges remain but Australia has shaken off its first recession in 28 years, global shares were at or near record highs by December and superannuation funds are firmly back in positive territory.
According to Chant West, the median growth fund, which typically holds 61% to 80% in shares and other growth assets, was on track to finish the year to December up around 3%. That’s a massive turnaround following global sharemarket falls in the range of 35% in February and March. It’s also a reminder of the importance of staying the course and holding your nerve during short-term market shocks.
The table below shows the annual price returns for major markets and assets in 2020.
Calendar year returns to 31 December 2020
|MSCI World Index (excluding Australia)||+14.0%|
|US 10-year bond||-1.0%|
|Aust 10-year bond||-0.4%|
|$A vs $US||+9.9%|
Australian residential property
|CoreLogic Home Value Index||+3.0%|
Sources: Trading Economics, CommSec, CoreLogic
The Big Picture
The COVID-19 health crisis that kept many people confined to their homes and shut great swathes of the economy triggered the biggest slowdown in economic activity since WWII, if not the Great Depression.
According to the World Bank, the global economy contracted by 4.3% in 2020. True to form, the Lucky Country fared a little better, contracting an estimated 2.8% after emerging from recession in the September quarter. It wasn’t all down to luck though.
The Australian economy finished 2020 in better shape than many had feared thanks to massive support payments by federal and state governments. This provided a financial buffer which helped individuals and businesses weather the on-again, off-again shutdowns due to coronavirus.
By the time of the December’s Mid-Year Economic and Fiscal Outook (MYEFO), the projected budget deficit for this financial year had been trimmed to $197.7 billion, down from the $213.7 billion forecast in October’s federal budget.
At the end of the year unemployment stood at 6.8%, after peaking at 7.5%, and inflation was a low 0.7%.
The Reserve Bank of Australia also did its bit to keep the economy, and jobs, ticking over.
Interest rates lower for longer
Over the course of 2020, the cash rate was cut from 0.75% to a record low of 0.1%. And for the first time, the Reserve Bank also introduced a target for the 3-year government bond rate which also sits at 0.1%.
The Reserve Bank has indicated that rates will remain at this level for at least three years, to give the economy time to rebuild and employment and wages to pick up.
The Reserve also announced:
- A term funding facility for the banking industry, and
- The purchase of $100 million of government bonds, also known as quantitative easing.
Australian Cash Rate Target
Yields on Australian 10-year government bonds fell from a high of 1.37% in January to finish 2020 at 0.98%. US Government long bonds closed at 0.91%. That’s small reward for holding bonds for 10 years and an indication that the market expects rates to mark time for a long time.
Many European countries – including Germany, France, the Netherlands and Switzerland – have negative interest rates, which means investors are effectively paying for the security of preserving their capital.
Low rates are a blow for retirees and anyone reliant on income from their investments. The best 12-month term deposit rates are currently below 1%, barely keeping pace with inflation.
A resilient Aussie dollar
A closing of the gap between Australian and international interest rates was one reason behind the resurgence of the local currency.
The Aussie dollar rose almost 10% against a weaker US dollar in 2020, ending at a near three-year high of US77c.
Australian dollar / US dollar
Source: Trading Economics
The strengthening Aussie dollar is also in response to higher commodity prices and an increasing appetite for risk.
Rising commodity prices
A key factor underpinning Australia’s lower than expected budget deficit was the strong performance of key commodities.
Iron ore prices surged 70% in 2020 on continued strong demand from China. There were also strong gains for natural gas (up 145%), copper, coal and agricultural commodities including rice, sugar, wheat and cotton.
Gold was up 25% to US$1,898 an ounce, after hitting a high of US$2,069 in August. This was due to its traditional safe-haven status as a store of wealth at a time when government debt worldwide is ballooning.
One of the biggest losers from the disruption to global economic activity was oil, as restrictions on the movement of people and goods brought transport to a halt. Oil prices were down more than 20%, despite OPEC producers restricting supply to support prices.
On the upside, fuel prices for Aussie motorists were 25c-30c cheaper on average before Christmas. This was just one factor helping the lift in consumer confidence to decade highs in December, as Australians hit the shops and headed for holidays.
Global shares also caught the growing wave of optimism, soaring to record highs by the end of 2020 as vaccines began to roll out across Europe, the US and elsewhere. The US Presidential election in November and the last-minute post-Brexit trade agreement between the UK and European Union before Christmas also removed some of the uncertainty overhanging markets.
Low interest rates were also a major factor, sending investors on the hunt for better returns on the savings they had accumulated from government stimulus payments and the cancellation of overseas travel.
Global shares (excluding Australia) rose 14% to record highs. The US S&P500 index finished 16% higher, but the tech-heavy Nasdaq 100 – home to the likes of Apple, Microsoft, Google, Facebook, Amazon and Netflix – jumped 48% as the pandemic hastened the global shift to a digital economy. When the global economy ground to a halt, billions of us turned to social media, online shopping and streaming services.
The same trend was evident on the Australian market, where the relatively small information technology sector was the best-performing sector, up 56%. Buy-now-pay-later company Afterpay was the top performing stock, up a staggering 303%, followed by online retailer Kogan, up 150%.
Elsewhere, traditional mainstays such as the banks, property trusts, utilities and energy languished. This was reflected in the annual return from the ASX200 (the top 200 companies by market value) which was down 1.5%, while the broader All Ordinaries Index was up 0.7% and the Small Ordinaries, home to market minnows, was up 6.6%.
Share price accumulation indices
Log scale, end December 1994 = 100
Sources: RBA, Refinitiv
Once dividends are added, the total return from Australian shares rose 3.6% in 2020. The graph above shows the ASX200 Accumulation Index which measure the total return for the top 200 companies versus US and global share returns.
Solid returns from residential property
While shares surprised on the upside, residential property did even better. The total return from residential property (prices and rents) on a national basis was 6.6%, compared with 3.6% for shares.
Despite fears of a property market crash as the country went into recession, open houses and auctions were suspended, and immigration ground to a halt, low interest rates and high household savings kept the residential property market alive.
Melbourne was the only market to record a fall in prices (-1.3%), but the big theme of 2020 was the flight from the cities.
With so many of us working from home and considering making it permanent, buyers rushed to pick up more affordable housing in relaxed regional locations within striking distance of major cities. As a result, regional housing (up 6.9%) outperformed capital cities (up 2.0%), albeit after a decade of slower price growth.
Change in residential housing values as at 31 December 2020
|Location||Month||Quarter||Annual||Total return||Median value|
Source: CoreLogic Home Value Index
The long and winding road to recovery
As 2021 gets underway, the focus should gradually shift from containment of the pandemic to economic recovery. But as the resurgence of COVID-19 overseas and in local hotspots shows, the road to economic recovery will be slow and bumpy.
The combination of massive stimulus measures and the rollout of vaccines give cause for optimism about a return to more normal times. According to the World Bank, the global economy is forecast to grow by 4% in 2021, while the consensus is for growth of around 4.5% for Australia.
Possible drags on global growth are political instability in the US, trade tensions with China and issues with access to vaccines and the speed of the rollout.
With inflation likely to remain weak and interest rates at or near zero, the servicing of high national debt levels remains cheap. But low interest rates make life difficult for savers and anyone who relies on income from bank deposits and bonds.
On the flipside, while shares are at risk of a correction after such a strong run in 2020, low interest and economic recovery should support corporate profits and growth assets generally in 2021.
We are also likely to see a shift away from assets that benefitted from the pandemic and shutdowns to investments that benefit from the recovery. So watch for a switch from technology and healthcare stocks in favour of resources, industrials, tourism, and financial stocks.
It also remains to be seen if trends such as working from home continue as the economy improves, with implications for residential and commercial property.
Whatever is in store in 2021, if we have learned one thing from 2020 it’s to stay invested and stay the course.