This calendar year has proved to be similar to 2020 in many aspects with the global financial and economic landscapes being continually dominated by the COVID-19 pandemic and its associated challenges. Indeed, investors have had to contend with the outbreak of two new variants of the coronavirus in 2021. The Delta strain was first detected at the start of the year and was followed more recently by a new strain, Omicron.
The emergence of these new variants acted to prolong the pandemic, resulting in a stop-start global economy disrupted by lockdowns and restrictions. This played havoc on businesses around the world causing raw material shortages, supply chain/manufacturing disruptions, and skilled labour issues. Nevertheless, despite some short bouts of subdued investor confidence alternating between longer periods of renewed optimism, most equity markets turned in a solid performance for 2021. Investor sentiment remained upbeat throughout the year, boosted by the firm commitment from central banks who provided coordinated monetary and fiscal support to the financial system ─ which proved to be a powerful force in supporting world economies.
The persistent low interest rate environment combined with the extraordinary central banks stimulus helped global equity markets climb steadily throughout this calendar year. Globally, investor confidence was also driven by a large number of companies reporting better-than-expected earnings results that beat market consensus. Then in October and November, market volatility increased as investors became concerned about extended corporate valuations along with hawkish US Federal Reserve comments regarding inflationary concerns. It took a sudden jump in bond yields and the identification of the Omicron variant to prompt a long overdue 5% correction in U.S. equities which also weakened other major markets. The fall however, proved to be short-lived and ultimately only served as a buying opportunity for those investors hoping to increase their investments exposure. More recently, equity markets hit another speed bump when China’s largest property developer— the Evergrande Group failed to meet its interest obligations amid a financial and liquidity crunch. Even the recent announcement by the US Federal Reserve policymakers that they intend to raise interest rates sooner than expected failed to dampen investor enthusiasm. All in all, world equity markets continue to be optimistic about the global economy, having so far exhibited strength throughout much of this pandemic. Investors appear to have taken all these issues in their stride and share markets have managed to close out the year either at, or near their all-time highs.
The MSCI All Country World Index rose 16.8% to 755 points for the calendar year, the S&P 500 Index outperformed all others and lifted 26.9% to 4,766 points. In comparison, China’s Shanghai Composite Index underperformed, rising only 4.8% to 3,640 points as a series of tight regulatory reforms placed downward pressure on some sectors including gaming, property, education, and technology. Domestically, the Australian S&P/ASX 200 Index added 13.0% to 7,445 points. Notably, the Communication Services and the Consumer Discretionary sectors were the standouts— rallying 28.5% and 21.3% respectively. By contrast, the Information Technology sector was the weakest—down 2.8% and the Energy sector fell 2.0%.
In commodities, gold finished the calendar year down 4.9% at US$1,805/ounce, and Brent oil lifted a solid 60.6% to ~US$78/barrel supported by the ‘reflation trade’ as global demand-supply dynamics came into play. The quoted iron ore price soared to unanticipated levels of ~US$230/tonne earlier in 2021, but it finished the year 24.8% lower at ~US$121/tonne due to lower demand on the back of emission-related steel production cuts in China and rising inventories at Chinese ports.
Following a 0.7% expansion in the June 2021 quarter, the Australian economy contracted 1.9% in the September 2021 quarter─ but better than expectations of a 2.7% decline. Prolonged lockdowns across NSW, Victoria and the ACT resulted in a substantial drop in household spending which was partly offset by growth in net trade and public sector expenditure. However, on an annualised basis, GDP was still up 3.9%.
Domestically, the Reserve Bank of Australia (RBA) continues to hold the cash rate at an historic low of 0.10% while also continuing its quantitative easing program (QE) to purchase government bonds at the rate of $4 billion a week at least until mid-February 2022 in order to further support economic recovery. The latest Board Minutes restated the view that the RBA does not intend to increase the cash rate until actual inflation is sustainably within the 2% to 3% target range. This would require the annual wage growth to lift to 3.0% from the current 2.2%, and we therefore do not expect the first rate hike until the first quarter of 2023.
The Australian dollar fell 5.8% to finish the year at the current ~US72.5 cents primarily on the back of a strong US dollar and a sharp decline in the iron ore price.
The most recent underlying inflation rate increased to 2.1% in the September quarter from 1.6% in the June quarter and the resilient labour market trend continued with the unemployment rate decreasing to 4.6% in November from 5.2% in October. We expect a gradual pick-up in underlying inflation to 2.3% over the course of this calendar year reflecting a strengthening domestic demand, stronger outlook for housing cost inflation, and a steady pick-up in wages growth further out.
Against the global backdrop of an abating pandemic crisis and economic recovery, we now expect the world economy to expand by a strong 4.2% in CY22 and then at a slightly lower 3.1% in CY23. As regards the Australian economy, we forecast an expansion of 3.1% in CY22 and then 2.8% in CY23 supported by growth in dwelling investment, higher consumer spending, and higher public sector demand.
Share market outlook
All up, high vaccination rates, a rebound in household consumption, and substantial policy support by the government is expected to underpin an economic recovery in Australia. While the emergence of the Omicron strain is a new source of uncertainty, it is not expected to derail the path to recovery. In this regard, a string of recent data highlights three aspects of Omicron – milder symptoms, significantly lower mortality rates and the potential to accelerate the end of the pandemic by crowding out potentially more lethal variants. Therefore, the overall outlook for the economy and corporate earnings in 2022 looks distinctly positive with investors well-positioned to take advantage via the reopening themes in share markets.
Against this balanced background as 2022 begins, the Australian share market is currently valued on a forward consensus price earnings ratio of 17.5x, which is 21% above the long term average of 14.6x. The forward consensus dividend yield for the Australian share market is 3.9% (80% franked). We also forecast further gains in the market and our current S&P/ ASX 200 index target is 7,700 at the end of calendar 2022. This is 3.4% above the 31st December 2021 close of 7,445 (excluding dividends).
We would like to reiterate our ‘Champion Stocks’ which have a long term positive thematic over the coming years and, therefore, we are not particularly concerned about the current year’s investment arithmetic or the analyst’s twelve month buy-hold-sell rating. Our ‘Champion Stocks’ are: Amcor, Brambles, Challenger, CSL, Goodman Group, Lendlease Group, Netwealth Group, Sonic Healthcare, and Transurban Group.
For those investors looking to gain exposure in the global share markets, we have recently produced a series of international investor reports titled, ‘Disruptive Innovations’. In this global series, we seek to identify innovations which could disrupt the marketplace across a range of sectors (Alternative
Proteins, mRNA Vaccines, AI-driven Aviation Surveillance and, De-polymerising Plastics) and the companies that are leveraged to benefit within each of these ground-breaking technologies. Our preferred ‘Disruptive Innovators’ are Arkema (Advanced Recycling & De-polymerising of Plastics); Nvidia Corporation (AI-driven Aviation Surveillance ); The Kellogg Company and Monde Nissin (Alternative Proteins); Sanofi and Arcturus Therapeutics (mRNA Vaccines)─ all are buy rated by the analysts.
These and more reports can be accessed online via the ‘client-only’ area of the Bell Potter website https://clientaccess.bellpotter.com.au/login