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Market Update 2021

Market Review

December 2021

Share markets were higher over December despite concerns about the spread of Omicron, the latest Covid-19 variant. Whilst Omicron appears to spread quicker, share markets rallied into the year end, as the strain has had less impact on hospitalisation rates compared to previous variants. The Australian share market gained 2.7% over the month whilst international shares gained 1.7% (unhedged in Australian dollars). Global property and global infrastructure stocks also performed strongly during December returning 4.2% and 4.1% respectively.

Overall, share markets had a very good year with the Australian market returning 17.2% and international markets 29.6%, whilst the global property market had a very strong 38% return for 2021. Bond markets disappointed over the year given the very low yields and the capital losses as bond yields increased throughout 2021. Nonetheless, 2021 ended up as another very positive year for diversified superannuation and pension investors.

Asset class performance as of 31 December 20211

Asset class 1 month
(%)
3 months
(%)
1 year
(%)
5 year
(% p.a.)
10 year
(% p.a.)
Australian shares
(S&P/ASX 200 Accumulation Index)
2.7% 2.1% 17.2% 9.7% 10.8%
International shares
(MSCI World ex-Australia - unhedged in $A)
1.7% 7.2% 29.6% 15.1% 16.8%
Global property
(FTSE EPRA/NAREIT Developed Rental Index unhedged in $A)
4.2% 11.2% 38.0% 9.1% 13.8%
Fixed income
(Bloomberg AusBond Composite Index)
0.1% -1.5% -2.9% 3.4% 4.2%
Cash
(Bloomberg AusBond Bank Bill Index)
0.00% 0.01% 0.03% 1.11% 1.94%

 

Global economies remain strong despite heightened risks from Covid-19

The underlying global economic conditions remain strong despite a resurgence in Covid-19 cases across the US and Europe. The US unemployment rate dropped to 4.2%, back to pre-pandemic levels, which has led to strains on the labour market and upward pressure on wage growth. Inflation has continued to climb (see table below) as demand for goods and services increases. In fact, the yearly change in US inflation has risen to a rate of 7.0%, which is the sharpest increase in over 39 years.

A similar story is playing out across Europe, where the Eurozone’s annual inflation rate has risen to 4.9%, the highest since the start of the European Union. In the UK, inflation is at 5.1%, the highest in over 10 years.

The persistently high global inflation has increased the probability of central banks’ moving to increase interest rates. The Reserve Bank of New Zealand has already begun increasing interest rates and the Reserve Bank of England is expected to do so next month.

 

Australia’s economic recovery constrained by restrictions and lockdowns

Australian inflation has been more moderate than other advanced economies. The third quarter inflation rate eased to an annual rate of 3.0%, which was mainly caused by higher energy prices and home building costs. However, nominal wage growth in Australia remained subdued even though some parts of the labour market are experiencing a skill shortage. The Reserve Bank of Australia has said that they want to see a more sustained increase in wage growth before moving to raise interest rates.

Australian retail activity increased by 4.9% in December as restrictions eased across the country and vaccination rates reached over 90%. However, lockdowns and other restrictions continue to constrain the Australian economy from getting back to full steam, but it is hoped that booster vaccine shots and getting used to living with the virus will help return Australian businesses to a more normal footing and boost economic activity and employment. Current expectations are that the June quarter of 2022 should see the economy once again start to grow at a decent pace.

Summary

The global economy continues to move along solidly despite the more recent wide-spread impact of the Omicron variant of Covid-19. It appears that the UK and the US may be getting to a point where herd immunity may start to have a positive impact and peak infections may soon be reached. If this is the case, it will be positive for investment markets heading into the second quarter of 2022.

Overall, we remain cautiously optimistic going into the new year mostly due to the high level of vaccination rates in advanced economies and the milder effects of the new variant. This backdrop should see another positive year for share markets as well as property and infrastructure assets, although we would not expect to see the strong gains that we had in 2021. High single-digit returns from share markets is a more realistic outcome for 2022, but as always keeping a well-balanced investment strategy and riding out market volatility is key to long-term outcomes. We look forward to updating you on further developments next month.

 


1 Bloomberg Finance L.P.  Please note, where past performance information is provided this should not be considered an indication of future performance.
2 Bloomberg Finance L.P., EISS Super, US Bureau of Labor Statistics.