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If 2021 taught us anything, it was to expect the unexpected and be flexible when your best laid plans fall in a heap.
At the start of the year, the economy was on the mend, vaccines were on the way and hopes were high that life would soon return to normal. But waves of new COVID-19 variants – first Delta then Omicron – scuttled that. Instead, we faced on-again off-again lockdowns, border closures and business disruption.
And yet, while our personal and working lives faced unforeseen disruption, our super and investments generally have surprised on the upside.
According to Chant West, the median growth super fund (which typically holds 61–80% in shares and other growth assets) is on track to return around 12% in calendar 2021. This follows a 3% return in 2020. Indeed, all risk categories from conservative to high growth posted positive returns last year.
As the table of financial market returns for the past two calendar years shows, at a time of historically low interest rates, shares and residential property have done the heavy lifting with US shares hitting record highs. The table also demonstrates the importance of diversification and staying the course, as some of last year’s top performers were laggards the year before.
Calendar year returns to 31 December (% change)
The big picture
Despite the challenges of dealing with a global pandemic, the Australian economy picked up steam in 2021. After shrinking 2.2% in 2020, economic growth was up 3.9% in the year to September and is on track for annual growth of 4.4%.
The world’s two economic powerhouses – the US and China – are doing even better. In the year to September, both grew at an annual rate of 4.9%.
While forecasting is even more of a mug’s game than usual these days, economists expect Australia’s economic growth will shift up a notch to around 5% in 2022. This is good news for jobseekers, with unemployment falling to 4.6% ahead of the Christmas rush while wages growth edged up 2.2% due to skill shortages.
But challenges remain. As global demand for goods and services picks up, ongoing lockdowns and border closures have disrupted global manufacturing and supply chains. The result is higher prices and inflation, which jumped to 3% in the September quarter after stagnating at an annual rate of 0.9% in 2020.
Inflation and interest rates
Australia’s official cash rate spent another year at the historic low of 0.1% and the Reserve Bank insists it will not lift rates until 2023 at the earliest.
While there is no doubt the next move in rates will be up, the Reserve Bank says it won’t move until inflation is “sustainably” between 2% and 3%, unemployment is closer to 4% and wages growth near 3%. Many economists believe it will hit these targets sooner and begin lifting rates later this year.
To add a global perspective, the inflation genie is already out of the bottle in the US where it stands at 6.8%. In the UK and Germany, it’s over 5%. While this is weighing heavily on financial markets, many commentators believe higher inflation will be transitory due to short-term supply chain blockages.
Even so, some central banks have already begun lifting rates, notably the UK and New Zealand.
Despite low short-term rates, there are signs of life at the long end of the yield curve. Australian 10-year government bond yields rose from 0.98% to 1.67% in 2021, while the yield on US 10-year bonds climbed to 1.51%.
Like other central banks, the Reserve Bank has begun winding back its bond purchases which will continue to put downward pressure on bond prices and lift yields. It also removed its 0.1% target on 3-year bonds, which saw yields jump almost immediately to 0.9%.
Low rates have been a thorn in the side for retirees and other investors who rely on income from fixed interest investments, so for these investors the sooner rates rise the better.
A lower Aussie dollar
It was a case of swings and roundabouts on currency markets.
After jumping 10% the previous year, the Aussie dollar fell almost 6% against its US counterpart in 2021, from US77c to US77.5c. This reflected the strength of the US economic recovery and hence its currency, rather than any weakness in the Australian economy.
The Aussie dollar appreciated 2.3% against the Euro and 5.1% against the Yen.
A lower dollar is good news for Australian exporters, who should enjoy further currency support until the Reserve Bank lifts interest rates.
Volatile commodity prices
Commodity prices surged ahead as economies reopened, increasing demand for raw materials. But there was volatility along the way due to supply bottlenecks.
The Reserve Bank commodity index rose 25.7% in the year to December, on the back of higher prices for liquefied natural gas (LNG), up 132%, and coal. Coal may be on the way out, but thermal coal was up 111% while coking coal rose 37%.
The price of iron ore fell 25% on weaker demand from China, but this followed a 70% surge in 2020.
Rising global oil prices were a feature, with Brent Crude up 53% on supply shortages as OPEC producers kept a lid on output. While great for investors, consumers were hit with record petrol prices at the bowser.
Global sharemarkets went from strength to strength, buoyed by economic recovery and strong corporate profits on the one hand, and low interest rates on the other. Investors continue to pile into shares in search of better returns that those currently on offer from cash and fixed interest investments.
The US market led the way, up 27% and hitting record highs along the way. European stocks also performed well, with the Euro Stoxx 50 index up 21%.
China’s market suffered from the government’s regulatory crackdown and the Evergrande property crisis, but still managed a rise of 4.8%.
Australia sat in the middle of the pack, with the All Ordinaries up 13.5% and the ASX 200 up 13%. The picture was even rosier when dividends were added, taking the total return to 17.7%. The best performing sectors were telecommunications, property trusts, consumer discretionary and financials. Only two sectors lost ground – energy and information technology.
Like shares, Australia’s residential property market soaked up cash looking for a home while interest rates are low. While great news for investors and homeowners, buying a home is increasingly out of the reach of first-time buyers.
As you can see in the table below from CoreLogic, national housing prices rose 22% last year, with the total return for investors 25.7% once rental income is included. The total return from regional property was an even better 31%, as city folk fled to the country for its perceived safety and affordability during the pandemic.
Among capital cities, Hobart, Brisbane and Sydney led the way. Sydney became the first city to surpass a median value of $1 million, after increasing almost $1,000 a day in 2021.
Index results as at 31 December 2021
Change in dwelling values
The road ahead
For the third year running, the pandemic is likely to dominate the economy and financial markets in 2022. Much will depend on the supply of vaccines and how successful they are in protecting against Omicron and any future variants of COVID-19.
Financial markets and investors will also be watching keenly for signs of inflation and rising interest rates. In Australia, both are likely to be constrained while wages growth remains low, and the Reserve Bank keeps rates on hold.
The wild card is the federal election, due to be held by the end of May. Uncertainty about the election date and the outcome will weigh on markets, household spending and business investment in the first half of the year.
And then there is always the possibility of a black swan event, something so rare it takes everyone by surprise. While it’s hard to imagine a swan any blacker than the pandemic we are dealing with now, it always pays to expect the unexpected. So buckle up, diversify, and stay the course.