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It’s an understatement to say the 2022 financial year was challenging, as financial markets grappled with uncertainty, volatility and the fog of war.
New strains of Covid and the Russian invasion of Ukraine put renewed pressure on already disrupted supply chains and pushed up prices.
In the latter months of the year, central banks responded to rising inflation by rapidly unwinding the stimulus measures put in place at the peak of the pandemic and jacking up interest rates. Markets tumbled on concerns that rapid and aggressive rate hikes by central banks would tip economies into recession.
As you can see from the table below, only commodities and real property recorded above-inflation returns in the year to June. This will be reflected in the annual performance of superannuation funds, as Australians brace for a fall in their retirement savings for only the fifth time since compulsory super was introduced in 1992.
Research houses Chant West and SuperRatings expect growth and balanced super options with 60% to 80% exposure to growth assets such as shares to report an average return of between minus 3% and minus 3.5%.
Table 1: Annual change in value to 30 June 2022
|MSCI World Index (excl. Australia)||-14.7%|
|US S&P 500||-11.9%|
|Cash rate||+75 basis points|
|Australian 10-year bond||+2.14%|
|US 10-year bond||+1.46%|
|$US per $A||-8.4%|
|Trade weighted index||-1.4%|
|RBA commodity index||+24.3%|
|Australian residential property|
|CoreLogic Home Value Index||+11.2%|
Consensus forecasts expect inflation to rise to between 6% and 9% in most advanced economies by the end of 2022. While the war in Ukraine has pushed up prices for energy, food and other commodities, lingering disruptions due to Covid are also taking a toll, especially in China.
After lifting 6.4% in calendar 2021 as borders reopened, the global economy is expected to slow to around 3% in 2022.
Despite the uncertain economic outlook, the Reserve Bank of Australia believes the Australian economy is resilient and expects it to grow by 4.25% this year before moderating to 2% in 2023.
Unemployment of 3.9% is the lowest in almost 50 years, but household budgets are under pressure as real wages go backwards.
Annual wages growth of 2.4% lags inflation of 5.1%, with the cost of food, energy and many goods and services on the rise. Rising interest rates, falling property values and dwindling super balances are also weighing on consumer confidence and spending.
Interest rates on the rise
One thing we can say with certainty is that the era of rock bottom interest rates is over. The Reserve Bank lifted the cash rate from 0.1% to 0.35% in May, to 0.85% in June, to 1.35% in July, with more to come. Most commentators expect the cash rate to be above 2% by the end of 2022.
Rising inflation expectations also flowed through to bond yields. Australia’s 10-year government bond yields lifted from a low of 1.08% in August to 3.66% by the end of June. Rising bond yields mean a fall in bond prices, which saw the return on government bonds fall 10.5% over the year.
Chart 1: Australian government bond yields (3-year and 10-year)
Source: Yield Report
Mixed fortunes for the Aussie dollar
Despite rising bond rates and commodity prices, the Aussie dollar fell against the US dollar over the course of 2021-22, beginning the year at US75c and finishing at US69c. But this was more to do with a stronger greenback than any fundamental weakness as Australia continues to post consistent trade surpluses.
In fact, the Aussie dollar rose against the currencies of many of our favourite destinations, up 14% against the Japanese yen, 4% against the UK pound and Euro and 3% against the NZ dollar. Good news if you’re planning an overseas getaway.
Overall, the Aussie dollar was down 1.4% on the trade weighted index which is supportive for local exporters and companies with US operations.
Chart 2: Australian dollar to US dollar
Commodity prices surged to record levels in the 2022 financial year, as developed economies emerged from Covid isolation boosting demand for raw materials. From February, war in Ukraine exacerbated supply shortages, lifting prices for commodities such as oil, gas, wheat and vegetable oils.
Thermal coal prices jumped 186%, natural gas surged 196% and crude oil was up 44%.
Bucking the trend was iron ore, which fell 40% from its record high in May 2021. This was due to lower demand from China, Australia’s biggest customer, as it enforced Covid lockdowns. However, at prices of around US$130 a tonne, iron ore is still well above its long-term average.
The Reserve Bank’s commodity index was up 30% in SDR terms (which is calculated on a weighted basket of five currencies – the US dollar, European euro, Chinese renminbi, Japanese yen and UK pound). In Australian dollar terms the index was up 33.7%.
This spike in commodity prices is expected to ease as inflation bites into economic growth, although demand is likely to remain strong for commodities exposed to the transition to low carbon emissions and food shortages.
Chart 3: RBA index of commodity prices
Australian shares finally buckled under the weight of rising interest rates and recession fears. The benchmark ASX 200 index fell 10% in the year to June, although this was lower than the global average fall of almost 15% and the US market decline of 11.9%.
To put this in perspective, shares were widely regarded as over-priced after several boom years. In 2020-21 alone, Aussie shares jumped 25%.
The most recent financial year’s losses were trimmed when dividends are added, with total returns from Australian shares (measured by the All Ordinaries accumulation index) down by 7.4%.
Despite the downward trend, some local market sectors rose above the gloom. The Australian utilities sector was the star performer, up 29%, followed by the energy sector, up 25%. The biggest falls were for information technology (down 39%) and consumer discretionary (down 23%) as Australians began tightening their belts.
Graph 4: Share price accumulation indices (total returns)*
Residential property peaks
Australian residential property was a sweet spot for investors, but even there the boom has peaked.
As you can see in the table below, national home values rose 11.2% in the year to June, although prices eased 0.2% in the final quarter and falls accelerated to 0.6% in June. The overheated Sydney and Melbourne markets were down 2.8% and 1.8% respectively in the June quarter.
While property values increased in all capital cities over the year, regional areas outperformed with annual price appreciation of almost 20%.
Even so, downwards momentum is set to increase in response to affordability issues, tighter credit conditions and rising mortgage interest rates.
While first home buyers are finding the going tough, investors are benefitting from tight rental markets and rents rising faster than house prices. Nationally, rents increased 9.5% in the year to June led by Melbourne and Sydney where average rents were up by more than 10%.
Gross rental yields rose 3.3%, with regional areas outpacing capital cities. Yields were highest in regional parts of the Northern Territory and West Australia.
Table 2: Australian residential housing values as at 30 June 2022
|Annual||Total return||Gross yield||Median Value|
Source: CoreLogic Home Value Index
The uncertain global outlook is set to persist well into the new financial year, as fears of recession mount and war grinds on in Ukraine.
Economic growth in Australia and abroad is expected to moderate in the year ahead against a background of rising inflation, higher interest rates and slower consumer spending.
The Reserve Bank expects inflation to peak at around 6% later this year, forcing a rise in the cash rate to more than 2%. While wages are growing, the rate of growth is likely to be constrained to around 3% by year’s end, or half the rate of inflation.
Aussie shares are tipped to fall further despite solid company profits as consumers rein in spending and the economy slows. Residential property values are also heading south, with some economists talking about double-digit falls with Sydney and Melbourne to be the hardest hit.