On this page
Just when we thought the worst of the Covid lockdowns and supply chain disruptions were behind us, in February 2022 a black swan appeared over the horizon in the guise of Russia’s invasion of Ukraine.
War disrupted energy and food supplies, pushing up prices. From May, the world’s central banks began ratcheting up official interest rates to combat surging inflation, sparking fears of recession and a sell-off in bonds and shares. It also marked the end of Australia’s residential property boom.
Super funds were not immune, suffering their first calendar year loss since 2011, although diversification constrained losses.
Ratings group Chant West estimates the median growth fund fell about 4 per cent last year. While this is bad news for members, especially those preparing to retire, it’s worth remembering that the median growth fund is still 11 per cent above its pre-Covid high of January 2020.
Calendar year returns to 31 December (% change)
| 2022 | 2021 | |
| Shares | ||
| MSCI World Index (excl. Australia) | -19.7% | +20.5% |
| S&P 500 | -19.3% | +27.0% |
| ASX 200 | -5.5% | +13.0% |
| Interest rates/Bond yields | ||
| Cash rate | 3.1% | 0.1% |
| Australian 10-year bond yield | +2.4% | +0.7% |
| US 10-year bond yield | +2.4% | +0.6% |
| Currency | ||
| $A vs $US | -6.2% | -5.8% |
| Commodities | ||
| Iron Ore | -6.5% | -25.3% |
| Oil (Brent Crude) | +11.4% | +53.0% |
| Gold | -0.3% | -3.5% |
| Australian residential property | ||
| CoreLogic Home Value Index | -5.3% | +22.1% |
Sources: Trading Economics, CommSec, CoreLogic
The big picture
Despite the global geopolitical and economic challenges, Australia remains in a better position than most. The year ended with a trade surplus, a better-than-expected federal budget bottom line and unemployment below 3.5 per cent.
The Australian economy grew by 5.9% in the year to September before contracting to a forecast 3.5% by year’s end, in line with most of our trading partners. Company profits have slowed, but only after lifting 18.6% in the year to September, the fastest pace in five years.
Inflation the biggest threat for investors
The main bugbear for investors and investment markets was and is rising in inflation, interest rates and bond yields.
Inflation sits around 7% to 11% in most advanced countries, with Australia and the US at the low end of that range and the Euro area at the higher end.
Graph: Australian inflation
The Reserve Bank of Australia (RBA) lifted rates eight times in 2022, taking the cash rate from 0.1 per cent in May to 3.1 per cent in December. This quickly flowed through to mortgage interest rates, putting a dampener on consumer sentiment and housing prices.
Bond yields on US and Australian 10-year bonds rose 4% to 3.88% and 4.04% respectively in the year to December. As yields surged, bond returns slumped. Australian bonds had their worst year in decades, with the S&P ASX Australian government bond index down 11%.
Aggressive interest rate rises by the US Federal Reserve pushed up the value of the US dollar against most major currencies, including the Aussie dollar which fell 6% to US68c despite a late bounce.
It was a nail-biting year for share investors, especially during the latter half of the year as markets suffered monthly panic attacks on the announcement of each new rate hike by the world’s central banks.
The US market led the weakness, with the S&P 500 falling 19% and the technology-heavy Nasdaq down almost 33%. Technology and cryptocurrency stocks – market darlings during Covid – buckled under tighter monetary policy as the economy reopened.
The Chinese market was also one of the biggest losers, down 15% on prolonged Covid shutdowns that closed much of the economy. European markets fell around 13% and Japanese shares finished 9% lower.
By comparison, the Australian market held up relatively well, helped by strong commodity prices and a less aggressive approach by the RBA. Even so, valuations remain attractive with the ratio of prices to historic earnings at 10.6, the lowest PE since 2009.
The benchmark ASX 200 Index finished 5% lower, dragged down by the information technology (-34%), listed property (-24%) and consumer discretionary (-23%) sectors. On the flip side, the energy sector surged 40% on rising oil, coal and gas prices, followed by utilities (24%).
Local share losses were also cushioned by dividend income, with the average dividend yield sitting above 4%.
Total returns for the ASX 200 Accumulation Index (share prices plus dividends) fell just 1%. As you can see in the graph below, Australia has consistently outperformed the global market on a total return basis for the past two decades.
Commodity prices surge on supply shortages
The war in Ukraine and continued supply shortages as Covid restrictions eased and global growth shifted up a gear, pushed up demand and prices for commodities. As mentioned earlier, this boosted the Aussie energy sector.
Thermal coal prices soared 166%, oil (Brent Crude) was up 11% and wheat rose 3%, lifting the Reserve Bank commodity index 16.6% in Australian dollar terms.
Australian residential property downturn
Rising interest rates claimed another scalp in 2022, putting an end to the housing boom. National average home values fell 5.3% in the year to December, according to CoreLogic. This was the first calendar year drop in prices since 2018 and the biggest fall since 2008 amid the GFC.
As the table below shows, the price falls were not uniform or universal. Sydney, Melbourne and Hobart led the way down, while Adelaide bucked the trend with a 10% gain. Housing prices in Perth and Darwin also continued to rise. Yet despite the weakening market, capital city housing values remain 11.7% above pre-Covid levels, while combined regional markets are still up 32%.
Investors benefitted from a 10.2% increase in rents over the calendar year due to high demand and low vacancy rates, ranging from 4% in the ACT to 15% for Sydney apartments.
After falling to record lows at the start of the year, national gross rental yields lifted to 3.8% in December on the back of rising rents and falling housing values. However, CoreLogic notes that net yields have likely worsened for most investors as mortgage interest rates rise faster than rental income.
CoreLogic Home Value Index as at 31 December, 2022
| Annual | Total return | Median value | |
|---|---|---|---|
| Sydney | -12.1% | -10.2% | $1,009,428 |
| Melbourne | -8.1% | -5.1% | $752,777 |
| Brisbane | -1.1% | 2.9% | $707,658 |
| Adelaide | 10.1% | 13.8% | $649,041 |
| Perth | 3.6% | 8.2% | $560,902 |
| Hobart | -6.9% | -3.2% | $673,333 |
| Darwin | 4.3% | 10.7% | $506,710 |
| Canberra | -3.3% | 0.2% | $846,993 |
| Combined capitals | -6.9% | -4.1% | $770,374 |
| Combined regional | 0.1% | 4.1% | $577,616 |
| National | -5.3% | -2.3% | $708,613 |
Source: CoreLogic
The road ahead
Just as 2022 surprised on the downside, it’s just possible that 2023 could surprise on the upside.
Global growth is forecast to slow to around 2.5% this year, and inflation is expected to fall. If inflationary pressures ease and central banks call a halt to further rate rises, recession may be avoided.
There is also potential upside if China successfully reopens its economy and removes some of its trade embargos on Australian exports. That would signal better returns from shares.
But challenges remain. Issues for investors to watch out for in the year ahead include:
- A protracted conflict in Ukraine, prolonging food and energy shortages
- A new Covid wave in China, which could further disrupt supply chains across the Australian economy, and
- Steeper than expected falls in Australian housing prices, which could lead to forced sales and dampen consumer spending.
But they are the known unknowns. If the last few years have taught us anything, it’s to expect the unexpected. After a run of difficult years, let’s hope this year’s black swans bring good tidings.
Leave a comment
You must be a SuperGuide member and logged in to add a comment or question.