Wishing you all a Healthy and Happy 2022!!

It is quite incredible to look back on the years 2020 and 2021 and to see over that time the strong investment markets in growth-oriented investment assets combined with the residential property market propelling at super speed throughout this period. Remembering that his is said in the context of what has been the biggest global pandemic for over 100 years causing adverse business and social conditions rarely seen before.

Across Australia, and the rest of the world, there have been city, state and country lockdowns and curfews; businesses, offices and factories closed on and off; working from home being accepted way of life (the new plan B!); border closures; travel bans; sports cancelled; weddings and funerals restricted; hotel and home quarantines; and the ritual of protective face masks being worn daily by billions of people. And, of course, in the past six or so months, billions of people getting much needed vaccinations of one, two or ideally, three doses. We now carry records of vaccinations on our iPhones like we do for a Drivers Licence!

It has been a very strange, very challenging, and a seemingly long period of time for all, indeed. Much of the past two years has been stop-start-stop-start but, although the impact of the virus remains with us, the damage caused by the ongoing virus scenario is lessening.  I think it is fair to say we are all fed up with it and just want to get on with life. Regain control, we say! Hopefully, more and more normality will occur in our lives in the coming months. In saying that, the Covid-19 pandemic has changed many things, probably some permanently, but not all bad.

In the initial stages of the Covid-19 virus and the quickly increasing awareness of it in early 2020, there were predictions that unemployment levels would be similar to those seen during the Great Depression; stock market crashes; property price collapses; horrific mortgage defaults; and untold millions of deaths globally from the virus. Panic was to be the new norm. Well, these fears did not really happen, and fortunately so.

The depth of the human spirit, businesses adapting to and improving change, technology advancements and its increased usage by all, massive government financial support and spending programs, near zero interest rates and, of course, the success of aggressive vaccination programs, all have helped take us to the higher ground where we are today. As 2022 now begins, and an acceptance that we must live with the virus but will overcome its presence, we are with an upbeat approach and, I believe, quite a positive outlook ahead.

As noted above, over the past two years, growth asset investors have received strong total returns, some of these stellar returns! And yes, higher markets do mean higher valuation levels. Conversely, defensive assets have had very low to negative real returns. It would be nice for this trend of very good returns on growth-oriented assets to continue for this new year of 2022, however, it is probably realistic that growth asset returns overall will be return more to normalised levels. Defensive assets returns can only be projected to be flat at best. Bonds may even be adversely impacted, as the Financial Times reports that globally many companies have increased their debt funding notably since Christmas as they rush to secure funding at the (still) low rates before rates rise. Increased issuance tends to mean higher interest rates occur.

In the past couple of newsletters, we have discussed in detail the increasing impact of the faster than anticipated rising global inflation, supply shortages and logistical restrictions, and staff shortages, that many developed countries are experiencing. This is becoming more obvious and is challenging, as we all know. However, as Australian Fund Manager, Ausbil, notes in their most recent Economic Outlook report, that the OECD December Economic Outlook Report forecasts global growth continuing on an above trend glidepath, slowing to a brisk 4.5% pace in 2022, then moderating to a sustainable 3.2% pace in 2023. Ausbil adds that, for Australia, it expects two exceptional quarters for growth, followed by above-trend growth throughout 2022 and leading into 2023.

In his recent address, the Federal Treasurer, Josh Frydenberg, stated that in the Mid-Year Economic and Fiscal Outlook that Australia has performed more strongly than any major advanced economy amid the greatest economic shock since the Great Depression. Presuming that this is true, not a bad platform for us. The Treasurer said, “Having performed more strongly than any major advanced economy throughout the pandemic, the Australian economy is poised for strong growth underpinned by Australia’s high vaccination rate and unprecedented economic support to households and small businesses”. Political speak, yes, but it does appear to make good sense and, overall, Australian corporate balance sheets appear overall as strong.

When looking at just where official cash rates may be heading, the yield curve can provide market implied expectations. We know that for the past year or so, the yield curve has been steadily steepening, that is becoming more normalised. This means that as you move out in duration, interest rates are higher. Longer dated bonds are getting higher in yield. It is still relatively flat from a historic point of view but there certainly is movement at the station. JP Morgan Asset Management reported that implied expectations show official US cash rates up from near 0% now to be around 75 basis points by the end of 2022, and for Australia at around 50 bps. Not big moves by historical standards but the risk is inflation rising higher than expected, which certainly appears it could happen. (US inflation is now at a 40 year high!). Its report shows that the implied expectation two years from now will have the US and Australian cash rate both at 1.50%. And it shows going higher thereafter. Certainly, that will see increased mortgage rates.

The global consequence of all these above variables will very likely see interest rate rises sooner than even recently predicted (particularly in the US); and have central banks further, but cautiously, continue tapering off their bond buying programs, causing probable bouts of market volatility in the months ahead. Yet, this is expected to be managed carefully given large debt levels because of the extreme measures taken over the past two years.

Anticipated market corrections may well happen during this adjustment period of the more back to ‘normal conditions’. Such corrections or pull backs could well provide good buying opportunities for long-term buyers of quality growth assets for both income and growth returns! When looking at just where official cash rates may be heading, the yield curve can provide market implied expectations. We know that for the past year or so, the yield curve has been steepening, that is being more normalised. This means that as you move out in duration, interest rates are higher. Longer dated bonds are higher in yield. It is still relatively flat from a historic point of view but there certainly is movement at the station. JP Morgan reported that the implied expectations show official US cash rates up from near 0% now to 75 basis points by the end of 2022, and Australia at around up 50 bps. Not big moves by historical standards but the risk is inflation rising higher than expected, which certainly could happen. The report shows that the implied expectation two years from now will have the US and Australian cash rate both at 1.50%. And it shows higher thereafter too. Certainly, that would see increased mortgage rates coming.

Interesting times we live in. I strongly believe that sensible investing is good for both your health and wealth! Investing is the foundation for our futures, especially when considering preparing for our non-working lives! Investing and having a commitment and focus to doing it is also a good example to show to our children! This is vital for their long-term futures!

As always, should you have any queries please do not hesitate to contact us.