December 2021 Review: Equities bounce back despite inflation & Omicron concerns

Updated: Feb 24

  • Share markets rose strongly over December, reversing the losses from the previous month.

  • Evidence of higher global inflation resulted in a small rise in bond yields and some losses on internet & IT equity sectors.

  • The $A firmed, following a sharp decline in November.

International Equities

Share markets rebounded early in December, following the losses recorded in the previous month. This rebound was sustained over the second half of the month, despite the evidence of further lifts in inflation and the prospect of ongoing disruption from the Omicron variant becoming more widespread. A 6.8% annual inflation result in the United States, accompanied by higherinflation readingsin Europe and United Kingdom, did notspook equity markets; but it did trigger a change in the pattern of price growth. Valuations of higher “growth” companies with lower current earnings (and the promise of growing earnings in future years) are more vulnerable in an environment of rising inflation and generally underperformed last month. In contrast, the more defensive stocks with solid existing earnings performed well, as evidence by infrastructure (up 5.7%) and property sectors (up 5.9%). News of the rapid spread of the Omicron variant may have tempered expectations that central banks will react swiftly in response to higher inflation, and this may explain some of the supportshown forthe more interestrate sensitive sectorssuch as property& infrastructure last month.

All major developed markets participated strongly in the equity rally last month. Once again, however, the Chinese and Hong Kong markets underperformed the broader global average. Payment defaults by Chinese property companies Evergrande and Kaisa dampened investorsentiment across the region. Chinese authorities have responded to indicators of weakening economic growth by cutting the Reserve Requirement Ratio on Chinese banks by 0.5%, which effectively adds liquidity to the Chinese financial system. Outside of China, it was generally a positive month for share markets in emerging economies, with South Korea (up 6.4%) and Taiwan (up 4.9%) performing well. Higher oil and commodity prices supported markets in other regions, including the Middle East and South America.

Australian Equities

A bounce in the iron ore price from recent cyclical lows provided the resource sector with some positive news over December. Resources rallied 6.7% over the month, with energy (up 2.3%) also benefiting from higher commodity prices. As was the case globally, property trusts (up 5.2%) and utilities (up 7.9%) were strong performers.

Overall, however, the Australian market underperformed the global average, with the S&P ASX 200 Index rising by 2.7%. Consumer staples (down 2.3%) were one area of weakness with Woolworths(down 6.9%) disappointing the market with a trading update highlighting additional COVID related costs in the vicinity of $1.2 billion for the first half of the financial year. In addition, as per the trend globally, the Information Technology sector (down 5.3%) experienced some heavy losses, with Afterpay leading the sector lower with a decline of 23.7%.

Fixed Interest & Currencies

The response of central banks to evidence of higher inflation continued to dominate the focus of bond markets last month. Although a number of central banks have either lifted cash rates already or indicated plans to become less accommodative, the actions by central banks have generally been within market expectations. This, in addition to the expected extra caution resulting from the spread of the Omicron variant, led to a relatively muted response on bond marketslast month to the news of higher inflation. The 10-year US Treasury Bond yield rose by just 0.09% to 1.52%. In Australia, where inflation appears to be more subdued than that in the U.S., longer term bond yields declined marginally over the month. The Australian 10-year bond yield fell by 0.02% to finish the year at 1.67%. Commentary from the Reserve Bank continues to suggest that any cash rate increase is still some way off, with the central bank waiting to see evidence of stronger wages growth before lifting interest rates. With unemployment falling to 4.6% and job vacancies at record high levels,some upward pressure on wages is expected to be experienced over 2022.

Following a sharp depreciation in November,the Australian currency steadied in December,rising from US 71.4 centsto US 72.6 cents. Higher commodity prices, particularly iron ore which rebounded nearly 20% over the month, provided a source of support for the local currency.

Important Information

The following indexes are used to report asset class performance: ASX S&P 200 Index, MSCI World Index ex Australia net AUD TR (composite of 50% hedged and 50% unhedged), FTSE EPRA/NAREIT Developed REITs Index Net TRI AUD Hedged, Bloomberg AusBond Composite 0 YrIndex, Barclays Global Aggregate ($A Hedged), Bloomberg AusBond Bank Bill Index, S&P ASX 300 A-REIT (Sector) TR Index AUD, S&P Global Infrastructure NR Index (AUD Hedged).

General Advice Disclaimer

This document has been prepared by Sage Advisers (AFSL 238039). Any advice provided is of a general nature and does not take into account personal circumstances. Any decision to invest in products mentioned in this document should only be made after reviewing the relevant Product Disclosure Statements. Should the reader wish to avail of using the above investment philosophy they should only do so firstly seeking personal financial advice through a financial planner. Past performance is not a reliable indicator of future performance.

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