Our January update video below takes you through key market movements so that you can understand the Australian economy as we commence the New Year.
2021 Year in review
There are no prizes for guessing what dominated the economic landscape in 2021. For the second year running, the pandemic was the focus for policy makers, markets, businesses, and individuals alike.
The year began with hopes that the rollout of vaccines around the globe would stem the spread of COVID-19 and allow economies to reopen. Instead, most countries were hit by wave after wave of the virus, periodic lockdowns, and ongoing disruption to lives and livelihoods.
Yet there were also positives. Australia’s vaccination rate exceeded all expectations while property and share markets soared. Investors who stayed the course enjoyed double digit returns from their superannuation, with the median growth fund tipped to return more than 12 per cent for the year.i
Australia key indices December | Share markets (% change) Year to December | ||||
2020 | 2021 | 2020 | 2021 | ||
Economic growth | -2.2% | *3.9% | Australia All Ordinaries | -1.45% | 13.56% |
RBA cash rate | 0.1% | 0.1% | US S&P500 | 16.37% | 27.0% |
Inflation (annual rate) | 0.9% | ^3.0% | Euro Stoxx 50 | -5.14% | 20.90% |
Unemployment | 6.6% | #4.6% | Shanghai Composite | 13.87% | 4.80% |
Consumer confidence | 112.00 | 104.3 | Japan Nikkei 225 | 16.01% | 4.91% |
*Year to September, ^September quarter # November
Sources: RBA, ABS, Westpac Melbourne Institute, Trading Economics
The big picture
If the pandemic has taught us anything, it is to expect the unexpected as new variants of the coronavirus – first Delta and now Omicron – hampered plans to return to a ‘new normal’. This saw governments removing restrictions one minute then reimposing lockdowns and border closures the next.
Yet through it all, the global economy picked up steam. Final figures aren’t available yet, but in the year to September the two global powerhouses the US and China grew at an annual rate of 4.9 per cent, while the Australian economy grew by 3.9 per cent.
The Australian economy is estimated to have grown by more than 4 per cent in 2021 and is forecast to pick up speed in 2022 to around 5 per cent. This is good news for jobseekers, with unemployment falling to 4.6 per cent ahead of the Christmas rush.
But challenges remain. As global demand for goods and services picked up, ongoing shutdowns disrupted manufacturing and supply chains. The result was higher prices and emerging inflation.
Inflation and interest rates
Australia’s inflation rate jumped from less than one per cent to 3 per cent in 2021. This is lower than the US, where inflation hit 6.8 per cent, but it still led to speculation about interest rate hikes.
The Reserve Bank insists it won’t lift rates until inflation is sustainably between 2-3 per cent, unemployment is closer to 4 per cent and wages growth near 3 per cent. (Wages were up 2.2 per cent in the year to September.) The Reserve doesn’t expect to meet all these conditions until 2023 at the earliest, but many economists think it could be sooner.
Some central banks such as the UK and New Zealand have already lifted rates. And while Australia’s cash rate remains at an historic low of 0.1 per cent, bond yields point to higher rates ahead. Australia’s 10-year government bond yields rose from 0.98 per cent to 1.67 per cent in 2021, while US long bonds finished at 1.51 per cent.
Even so, low interest rates were not enough to convince everyone to resume normal life and spend. While consumers remained positive overall, the Westpac-Melbourne Institute consumer sentiment index fell 6.9 per cent in the year to December.
Shares continue to shine
Global sharemarkets made some big gains in 2021 on the back of economic recovery and strong corporate profits. The US market led the way, with the S&P500 index up 27 per cent to finish at near record highs.
European stocks also performed well while the Chinese market suffered from the government’s regulatory crackdown and the Evergrande property crisis.
In the middle of the pack, the Australian market rose a solid 13.5 per cent in 2021. The picture is even rosier when dividends are added, taking the total return to 17.7 per cent. The best performing sectors were telecommunications, property trusts, consumer discretionary and financials. Only two sectors fell – energy and information technology.ii
Volatile commodity prices
As the global economy geared up, so did demand for raw materials. Commodity prices were generally higher but with some wild swings along the way. Oil prices rose around 53 per cent on supply constraints and increased demand. And although coal is due to be phased out in the long term, thermal coal prices soared 111 per cent and coking coal rose 37 per cent.
Australia’s biggest export, iron ore, fell 25 per cent but only after hitting a record high in May.
Despite demand for our raw materials and a sound economy, the Aussie dollar fell against the strengthening greenback. After starting the year at US77c it finished at US72.5c, providing a welcome boost for Australian exporters.
Property boom
It won’t have escaped anyone’s notice that Australia’s residential property market had another bumper year, although the pace of growth shows signs of slowing.
National home prices rose 22.1 per cent in 2021, according to CoreLogic. When rental income is included the total return from property was 25.7 per cent.iii
Regional areas (up 25.9 per cent) outpaced capital cities (up 21.0 per cent), as people fled to the perceived safety and affordability of the country during the pandemic. Even so, prices were up in all major cities, led by Hobart (28.1 per cent), Brisbane (27.4 per cent) and Sydney (25.3 per cent). Melbourne suffered from prolonged lockdowns, up 15.1 per cent.
And in news that will please owners and investors but dishearten first time buyers, Sydney became the first city to surpass a median value of $1 million.
Looking ahead
The pandemic is likely to continue to dominate economic developments in 2022. Much will depend on the supply and efficacy of vaccines to protect against Omicron and any future variants of the coronavirus.
Financial markets will also keenly watch for signs of inflation and rising interest rate. In Australia, inflation is unlikely to be constrained while wages growth remains low, and the Reserve Bank keeps rates on hold.
The wild card is the looming federal election which must be held by May. Until the outcome is known, uncertainty may weigh on markets, households, and business.
i https://www.chantwest.com.au/resources/remarkable-a-10th-consecutive-positive-year
Unless otherwise stated, figures were sourced from Trading Economics on 31/12/21
Investing in inflation
Inflation appears to be firmly on the rise and while that is bad news for consumers it’s not necessarily bad news for investors. In fact, inflation may provide new opportunities.
In the September quarter, the consumer price index (CPI) rose 3 per cent year on year, a level previously not forecast to be reached until 2023. The underlying rate of inflation, which removes extreme price changes and is generally considered a more accurate reflection of what is happening on the ground, increased 2.1 per cent on an annual basis.
Now the Reserve Bank of Australia (RBA) is looking at bringing forward interest rate rises in the wake of this growing inflation rate. When it does, it will be the first time in 11 years that the bank has raised interest rates.
This development is highlighted by the RBA’s relaxing and then abandoning its target for the 3-year government bond rate (the benchmark) which it had originally set at 0.10 per cent. By the start of November, the market had pushed this rate above 1 per cent, 10 times the RBA’s original target, effectively forcing its hand.i
The RBA’s stated aim is to keep the inflation rate within its 2-3 per cent target range. But some seasoned market observers are forecasting the rate could get as high as 3 to 5 per cent by 2023, and perhaps a touch higher.ii
So why is this happening now?
Factors behind the rise
There has been a combination of factors leading to the uptick in inflation, mostly resulting from events stemming from the COVID-19 pandemic and the prospect of a recession fading fast.
These influences include cost pressures from global and local supply chain bottlenecks along with higher energy prices, an uptick in rents and rising insurance costs.
A shortage of labour, partly on the back of the absence of migration and casual overseas workers throughout the pandemic, is now also putting pressure on wages.
For some months, there has been debate over whether inflation was just a transitory event in the wake of COVID, but it is beginning to look more permanent as the months go by.
Opportunities for investors
Inflation is not all bad news for investors, but it may change the way you think about your investments.
The low interest rate regime that led to soaring property prices has left many investors with healthy gains in asset prices, adding to their wealth. While the move to higher interest rates may make borrowing money harder and take some of the boom out of the housing market, it is worth remembering the gains made to date are unlikely to be completely wiped out.
But it’s not just property; all major asset classes are highly valued at present.
Rising inflation traditionally erodes the value of bonds and cash. As interest rates move north, the appeal of those bonds offering the current low rates will fall and in turn so will the price.
As a result, it may be worth assessing whether your asset allocation to bonds is still appropriate for your circumstance and long-term goals, as floating rate bonds or inflation linked bonds may be more appropriate.
Quality stocks still attractive
The reduced appeal of longer-term bonds traditionally increases the appeal of equities as a better hedge against rising inflation.
Also, with a once-feared double dip recession now looking unlikely in North America, Europe, China and Japan, many companies are expected to enjoy continued growth in what is still a low interest rate environment.
While sharemarket returns may be more modest than in recent times, many companies still offer potential. Quality companies offering a high return on earnings, a lowly geared balance sheet and the ability to set prices, will continue to provide attractive investment options.
Inflation and interest rates
The challenge with a higher inflation rate is that it could outpace any growth in interest rates, leaving those weighted towards long-term fixed interest investments in a situation where their money is being eroded over time. As the global economy begins to shift gears, now may be the time to consider reviewing your portfolio to reflect the changing conditions.
If you would like to know more about whether your current investment mix is appropriate for your circumstances and the times, please give us a call to discuss.
i https://www.rba.gov.au/media-releases/2021/mr-21-24.html
ii https://theconversation.com/australias-reserve-bank-signals-the-end-of-ultra-cheap-money-heres-what-it-will-mean-170928
The gift of giving this Christmas
Gift-giving is typically a big part of celebrating Christmas and provides a great opportunity to reach out to support those who have done it tough this year.
Charity is not just about money
There are so many ways you can give back to the community. It’s not always about making a monetary contribution – giving your time is just as valuable. Volunteering at the local soup kitchen on Christmas Day or helping at your local Foodbank or food rescue service like OzHarvest can be just as valuable. Donating clothes, blankets or any other household items that will help those less fortunate or vulnerable is always welcome, especially at shelters for both men and women.
In recent years, gift bags or hampers are becoming increasingly popular too. It’s as simple as buying non-perishable food items or toiletries from the supermarket and creating a food hamper or gift bag.
Every Christmas, Kmart has the Wishing Tree Appeal whereby you can purchase a gift for a child and leave it under the tree in the store.
If you’re unable to donate cash or volunteer your time, a blood donation at the Australian Red Cross is another option. They are always in desperate need of donors. And when you donate, you’ll not only get to enjoy a little snack afterward, but you’ll receive a text message a few days later telling you exactly where your donation went.
Donating regularly
During the pandemic, there was a significant decrease in the number of donations made to charities across the country, and unfortunately, the amount of money we donated declined as well. People were unsure about job security, whilst others had chosen to donate specifically to the Bushfire Appeal early in 2020.i
Now we are coming out the other side of the pandemic economically, reports show donations are rebounding and are on the rise again. Those who donate, do so regularly and they usually have specific charities that they donate to. This may be due to personal circumstances or to support something they are passionate about.
If you’re considering donating to a charity this Christmas, you may want to do a little research first to find out exactly how your money is being distributed. How much goes directly to those in need and how much is being spent on admin and running costs. This is an important factor for many and may impact your decision in terms of which charity you choose to support.
The positive effects of donating or volunteering
Donating – whether it’s our time or money – will always make us feel good, but it shouldn’t be the key driver. Think about the impact your donation or time will have on those who are on the receiving end.
Donating will not only have a positive effect on the recipient, but it can also be beneficial to your children. You can teach them from a young age that giving back to the community can be very rewarding for many reasons.
Maximising your donation
There are so many charities to choose from in Australia, but it’s also worth considering international organisations as well. You may prefer to donate locally, but if you decide to choose an international charity, your dollar will more than likely go a lot further. Especially in developing countries, where they may need clean water, medical supplies, or even infrastructure to build schools for young children.
Remember, if you donate $2 or more, you may also be able to make a claim on your donation at tax time.
So, whether you’re volunteering at a homeless shelter or soup kitchen or giving a monetary donation – helping others who are less fortunate could be the best gift of all this Christmas.
To find out more about volunteering or donating in your local city go to – Christmas In Australia
i JBWere and NAB Charitable Giving Index
Economic Update Video – December 2021
Our December update video takes you through key market movements so you can understand how the Australian economy is faring at the end of 2021.
December and summer have finally arrived, and you can almost hear the collective sigh of relief as 2021 draws to a close.
As November drew to a close, all eyes were on the new strain of the coronavirus, Omicron. Global shares fell sharply on fears that Omicron will spread more easily than other variants and existing vaccines may be less effective against it. Europe is already facing a spike in COVID cases and new lockdowns. Global oil prices fell 10% on Black Friday (November 26) on the threat of renewed border closures and reduced demand for air and road travel. Markets are likely to remain volatile until there is confirmation that a new vaccine can be created quickly, which experts believe is likely.
Elsewhere, the economic smoke signals were mixed. Australian company profits rose 4% in the September quarter, and 5.4% over the year, supported by government subsidies. Not surprisingly, the NAB business confidence index rose 11.2 points in October to 20.8, its second highest result on record. But wages growth is lagging, up 0.6% in the September quarter and 2.2% over the year. Unemployment increased from 4.6% to 5.2% in October while underemployment rose from 9.2% to 9.5%. While retail sales jumped 4.9% in October as lockdowns ended in some states, consumers remain jumpy. The ANZ-Roy Morgan consumer confidence rating fell over 2 points in October to 106.0. Adding to hip pocket nerves, the national average unleaded petrol price hit a record high of 170.4c a litre in November. The Aussie dollar fell 4c in November to US71.2c.
Whatever your plans for the holidays, we wish you and your family a happy festive season.