Market Overview – December Quarter 2021

Triple S returns to December 2021

Investment option	3 months %	1 year %	3 years % p.a.	5 years % p.a.	10 years % p.a.
Cash	0.0	0.1	0.7	1.2	2.0
Capital Defensive	0.3	2.5	4.7	4.3	5.1
Conservative	1.0	5.6	6.9	5.9	6.8
Moderate	1.8	9.5	8.7	7.4	8.2
Balanced	2.6	14.4	11.6	9.4	9.9
High Growth	3.2	16.9	13.0	10.6	11.6
Socially Responsible	5.8	18.6	13.2	9.7	10.0

Returns net of fees and gross of tax, based on Super SA unit pricing formula.

The question dominating central bank discussions: is inflation transitory or sustained?

In the December quarter, the global economy continued to recover. As global vaccine rollouts picked up pace and 80% plus vaccination rate milestones were reached, most economies began easing restrictions. Coupled with low interest rates and government spending, demand for goods soared, unemployment fell, pockets of labour shortages led to wage growth, and business and consumer confidence was strong. Overall, these factors helped drive company earnings higher, particularly in developed countries. As consumers continued to have a high demand for goods, the pressure on global supply chains led to rising inflation pressures.

Globally, the topic of inflation featured heavily on central bank agendas. Central banks began revising and bringing forward the timeline for interest rate increases. In the US the probability of an interest rate increase as soon as March 2022 rose considerably. The Fed also signalled it expected to raise interest rates three times in 2022 to combat rising inflation. Inflation has also picked up in Australia. While moderate compared to the US, it is still a key economic watchpoint. The Reserve Bank of Australia remains patient in its approach to lifting interest rates, explaining that it will also use wages growth as one of the guideposts in assessing the economy’s progress.

Well diversified portfolios are the key to navigating this period. 

Australian share market

Australian shares (S&P/ASX 300) delivered a 2.2% return over the December quarter, a fifth consecutive quarterly gain despite experiencing a period of increased economic disruption as the Omicron COVID-19 variant spread through the population. Sector performance was mixed, with Materials (+12.7%) leading gains on the back of strong commodity prices, particularly those linked to the electric vehicle value chain. Iron ore prices staged a rebound in December after the Chinese government stated it would focus on economic stability in 2022. The biggest laggards were Energy (-7.5%), due to volatility in oil prices, while Information Technology (-4.6%) declined as valuations of companies in this sector were pressured amid expectations of interest rate rises in 2022. 

International share markets

Notwithstanding areas of concern, developed market equities showed resilience and continued the upward trend to set new highs. Global developed market equities ended the December quarter with the MSCI World ex AU index returning +7.2% (Australian Dollars) led by gains from the US and Europe.  In contrast, the MSCI Emerging Markets index recorded a -2.0% (Australian Dollars) return over the 3 months.

Despite a weaker November, the US market was strongly positive overall. Several European countries reintroduced restrictions on travel and hospitality industries due to the Omicron variant, however, markets across Europe performed strongly. China was one of the worst performing markets, largely driven by fears over a potential lockdown following the rapid spread of the Omicron. Elsewhere in Emerging Markets, Turkey’s share market rose but underperformed in Australian Dollar terms because of significant currency weakness, Brazil lagged as the central bank continued to raise rates in response to rising inflation and Russia fell as geopolitical tensions with the West heightened over Ukraine.

Diversified Strategies Growth   

After a period of uncertainty in early 2020, a recovery in market sentiment has seen transaction volumes recover to pre-COVID-19 levels. Most unlisted markets continue to build in upward revaluations, catching up to the trend in listed markets.

Property

The Australian property market experienced an increase in activity in the December quarter as lockdowns in New South Wales and Victoria lifted, albeit with the Omicron variant disrupting the recovery. Demand for assets in the industrial sector continued to remain strong and there was significant uplift in underlying valuations. The office sector has remained strong, having seen an improvement in leasing activity towards the end of the year. Whilst the retail sector continues to be impacted by the effects of both the pandemic and e-commerce, it appears to have stabilised.

Fixed Interest

The Australian bond market posted a negative performance over the quarter, with Australian Government Bond yields significantly increasing over the quarter, with the one month change in 3-year Government Bonds being the largest since June 1994. The sharp move higher in bond yields was caused by the RBA abandoning its ‘Yield Curve Control’ (buying bonds to keep the yield down 0.1% for 3-year Bonds).

Inflation surprises and upside in economic data prompted the market to reassess the RBA’s guidance and now expects official rate increases as soon as April 2022. Increases in rates will mean there will be downward pressure on existing bonds. Global bond markets experienced a volatile quarter though finished the quarter largely unchanged.

Cash

The Australian cash market returned 0.0% over the quarter. Money market yields remain at historically low levels as the RBA continues to hold the cash rate at 0.10%.