despina

Thinking about a new job in 2022?

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Nailed the job interview and the pay negotiations? Congratulations you may have ticked the new year, new job resolution off your list.

But before you bask in the glory of a job well done there may still be a few financial factors to consider. Switching jobs could have implications for your super, insurances, and your spending plan.

Super

Once a new job might have meant changing super funds. Often that resulted in people having several super funds that then had to be consolidated into a single fund. But things are changing.

When you begin a new job you should be offered a standard choice form within 28 days. If you want your employer to contribute to a new fund, you provide those details on the form.

Up until October 31 last year if you didn’t fill in the form your employer would make contributions on your behalf to its ‘default fund’. From November 1, 2021 that may no longer be the case. Your super fund is deemed ‘stapled’ to you when you change jobs or even industries.

If you don’t fill in the choice form your employer will check with the ATO whether you have an existing super account. If you do, and it can accept contributions for you, your employer will contribute to that fund.

If you don’t have an existing fund or it can’t accept contributions for you, your employer will contribute to its default fund. There may still be reasons you would like your employer to contribute to a different fund. For instance, another fund may have a wider range of investment options, extra insurance benefits, or a better performance track record.

Starting a new job can be a good time to begin making voluntary contributions or salary sacrificing into your super fund. Or if you’re already contributing or salary sacrificing a pay rise may make it possible to increase them.

Insurances

If you are changing super funds it is important to think about any insurance cover provided by the fund. If a super fund hasn’t received any contributions for 16 months then your insurance may be cancelled.

If you want your insurance to continue in an existing super fund where you haven’t received any contributions then you need to contact your fund and opt-in or make a contribution.

Spending plan

If a new job or promotion means you’re rising up the pay scales, it’s a great time to revisit your spending plan. It can be easy to lose any financial gains by changing up your lifestyle.

Setting fresh intentions about how to use the extra dollars could be better for your long-term financial outlook. Think saving, investing, tax effectiveness.

You may also accept a reduced pay to switch careers, take a job with better development prospects, or to shift to part-time work to support family responsibilities or study.

If that’s your situation it’s important to ask how to best use the dollars at your disposal. How can you make the most of what you have both now and for the future?

If you have any questions, please contact us.

Economic update – February 2022

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Key points

  • A month of elevated market volatility
  • United States (US) Federal Reserve (Fed) plans dominate market sentiment
  • Stronger growth in US economy but a moderating outlook
  • Moderate conditions in Australian economy but a likely bring forward of rate rises by the Reserve Bank of Australia (RBA)

The Big Picture

This time last year there was much optimism around the world. Biden had replaced Trump in the White House; vaccines were being rolled out; and China’s economy was on a tear.

For many of us, 2022 has started with travel disruptions and holiday plans changed or shelved. For investors there were some heart-thumping gyrations on equity markets. Some mega-cap tech stocks in the US taking a big tumble.

But as we peer through this haze of uncertainty, we see a calmer 2022 and cause for some muted optimism. The Omicron variant of COVID-19 seems to be far less likely to cause serious illness and death than Delta and its predecessors. The vaccination programme went very well (in the end!) and more than a third of Australians have already had their boosters. Of course, there may be new strains on the horizon to cause concern but we seem to have the pandemic under better control than we did in 2021.

A lot of the market volatility was arguably caused by speculation concerning what the US Fed would do with monetary policy at its January meeting and beyond.

The short version is that the Fed announced nothing that most finance professionals did not expect. Rate hikes will start in March as the Quantitative Easing bond purchasing programme ends. The Fed is quite relaxed about how it will deal with the $9 trillion debt now accumulated over recent times. It will let some bonds “run off” as their terms expire in an orderly fashion. There is no set schedule and the Fed seems to be in control.

On the matter of the number of rate hikes in 2022, the market largely expects at least three though there is speculation that it could be as high as six. The Fed seems to be going along with that view. Although to laypeople this might seem like a big scary rate hike sequence, the fact is not. Under the worst case of six hikes in 2022, the Fed funds rate will still be well under its “neutral” rate of 2.5%. That is, monetary policy will still be very loose as we go into 2023. This is not about tightening monetary policy; it is about making it less accommodating.

The Fed funds rate was 2.5% in late 2019 just before the pandemic struck. It is now 0.0% to 0.25%. With six hikes in 2022 the Fed funds rate will be just under 1.75%. On the growth side, US fourth quarter (Q4) 2021 Gross Domestic Product (GDP) just came in at a massive 6.9% against an expected 5.5%. The consumption component was well above 3%. The latest US unemployment rate is 3.9%. The US can easily handle a gradual return to normal monetary and fiscal conditions. Indeed, not to start this journey would be irresponsible and likely cause problems in the future.

At home, our economy is not quite as strong – largely due to our big shutdown in the second half of 2021 and a late response to the call for vaccinations (admittedly hampered by poor government decision making). Our latest unemployment rate is 4.2% compared to an expected 4.5%. There are, however, complications due to international travel restrictions for some workers. Perhaps 4.2% overstates the true strength of our labour market but it’s not bad (it was not less than 5% in any month from 2012 to 2019, inclusive).

On the inflation front, we just got a great result but it wasn’t met with as much enthusiasm from the press as it deserved. A Sydney Morning Herald story referred to it as “inflation surging”. In fact, the RBA’s preferred measure – the so-called “trimmed mean” was 2.6% – right in the middle of the RBA’s target range of 2% to 3%.

The RBA has been struggling for a very long time waiting for a return to the range from persistently low inflation. Nevertheless, the eminent economist from Westpac, Bill Evans, was the first well-known economist to call (just before the inflation print) for a tiny hike in August to 0.25% followed by a full 0.25% hike a few months later. Others have now joined that party. Bill is often right, and we respect his analysis.

At the December board meeting, the RBA omitted the long-held position that the first hike probably wouldn’t be until 2024 – so people interpreted that change as rates are more likely to start to rise in late 2023. The Australian economy could easily follow Bill Evans’ rate scenario but at this point there is little need for a higher official cash rate. The RBA did not meet in January.

On top of the standard data, federal Treasurer Josh Frydenberg alerted us to the fact that Australian households have saved up $260 billion during the pandemic which they could release into the economy at any time! Of course, they need something to spend it on – like ‘safe’ bars and restaurants, holidays, and Rapid Antigen Tests. Households might continue to be a little cautious as there is the looming prospect of higher interest rates, including for mortgages, later in the year but there is mounting pressure to start to spend more.

We think some Australian economic data in the first half of 2022 Australian might be a bit soft at times but we are cautiously optimistic about the second half. There is a welcome growth in cooperation between the states and the federal government over vaccinations, border restrictions and public health policies. This better cooperation may also be aided by the Federal election to be held in the first half of the year.

China is a bit of a worry though! Its economic data have softened of late as it tries to hang on to its ‘zero COVID’ policy. The People’s Bank of China (PBoC) did cut rates this month as others looked to raise them. China’s exports and imports each grew around 20% and its inflation was soft at 1.5%. China is still coming to terms with its problems in the property sector. We see this as a possible low point before China builds up a head of steam. However, its latest GDP growth number was an impressive 8.1%.

When we turn our attention to companies’ views of 2022 the picture is a bit mixed. The US Q4 reporting season, which is coming to a close, threw up some great results and some definite misses. For a change, some of the big banks did not do so well but some tech stocks did quite badly. In particular, pandemic darlings, Netflix and Peloton, had their share prices slashed on weaker prospects. Indeed, there is a widespread revaluation of mega-cap tech stocks. Companies with high valuations need to continue to grow rapidly to hold on to their lofty price-to-earnings (P/E) ratios. Higher interest rates and moderate growth pulls the rug from under their valuations.

The 2021 second half company reports are just getting under way in Australia. What we will be looking for are statements about how they are going to deal with the Omicron fallout. Nevertheless, our detailed analysis of broker forecasts of company dividends and earnings in Australia and the US have improved throughout January. That adds comfort for our view that we could have slightly above average returns in 2022 for each market – after the January volatility has subsided.

Asset Classes

Australian Equities

The ASX 200, like most major markets, experienced unusually high volatility during January and particularly within the day. The market was down 6.4% on the month. The intra-daily range was often well above 1%. Many factors possibly contributed to this volatility including lower trading volumes.

The Energy sector performed well on the back of an oil price surge of over 15% but our Information Technology (IT) sector lost nearly 20% in line with global trends.

There has been reported a large inflow of funds into broad based Exchange Traded Funds (ETFs) here and overseas suggesting some investors are ‘buying the dips’ and supporting the base.

It is always difficult to pick the bottom of any market. However, we believe the market is not expensive and earnings expectations could lead to a rebound once the volatility has subsided.

International Equities

Except for London’s FTSE index, most major equities markets and the world index suffered major losses during January. The reporting season in the US, which is near its end, does appear to have been somewhat weaker than those of 2021 – particularly in the mega-cap tech sector. This was to be expected as the recovery matures.

Like with the ASX200 we see a reasonable upward trend after the volatility subsides. The fundamentals outside of tech look favourable. ‘Catching a falling knife’ as in buying in volatile times before a bottom has reasonably been determined is ill-advised for most investors. However, we do have the S&P500 relatively attractive even after an extremely promising two-day rally to close off January.

Bonds and Interest Rates

The Fed all but confirmed a rate hike at the next meeting in March with three to five more to follow this year. The bond-purchasing programme is set to end – also in March. The Fed is in no rush to deal with its inflated balance sheet debt of $9 trillion – but it flagged it is plotting a course. The Fed will likely let some bonds ‘run off’ after their terms expire and in a controlled fashion.

The market is pushing the RBA to act on rates but we see little need for such a policy in Australia just yet. We are lagging behind the US and the United Kingdom (UK) in coming to terms with the pandemic. If the RBA does act this year, we think it will be a gentle response – at least at first – to test the water. The RBA is not known for swift policy action in either direction.

The PBoC cuts its reference rate in an attempt to assist its struggling economy. Its latest growth rate was a healthy 8.1% but the prospect for softer growth is lurking in the wings.

Bond yields in the US and Australia have lifted across the term structure. However, we do not see enough movement to make bonds attractive compared to equities any time soon.

Other Assets

There were big double digit growth rates in the prices of oil and iron ore during January. The price of iron ore rose to nearly $150/tonne after spending a good part of late 2021 well under $100.

The Australian dollar fell by 3.4% during the same period. Gold, however, was unexpectedly flat, losing 1.4% in January.

Regional Review

Australia

With an election looming and the economy not in its most robust state, neither major party is likely to want to rock the boat on the run in. There will be, at least, promised stimulus on the way. Of course, it is one thing to promise and another to get a policy voted in by both Houses.

Our jobs data, on the face of it, were promising. There were 64,800 new jobs created in the latest month (December 2021) when only 45,500 were expected.

The unemployment rate fell from 4.5% to 4.2%. While 4.2% would ordinarily be considered to be classified as Full Employment, there are so many factors such as the pandemic and international travel to make it harder to interpret. It was August 2008 when we last had a lower unemployment rate!

Our inflation rate, on the other hand, was unequivocally good. The headline rate was 3.5% but the RBA’s preferred ‘trimmed mean’ estimate that strips out more volatile items was 2.6%.

We do not have the 4%, 6%, and 8% inflation rates that plague other major countries. We, therefore, do not need to follow their lead on monetary policy. We can go our own way.

There is much anecdotal evidence that bars and restaurants in Australia are operating at well below even COVID-era capacity. But, as more of the population gets their COVID vaccination booster, perhaps clients will return and spend those hard-saved ($260bn) dollars from the lockdowns.

The economy might be a little slow at the start of 2022 but we reasonably expect growth to pick up during the remainder of the year.

China

China’s economic data are largely at the weaker end of expectations. GDP growth at 8.1% is certainly strong but some of this figure is due to measuring GDP from a lower pandemic base.

The Winter Olympics, like the Summer Olympics in Tokyo, are struggling to make a fist of it. On top of all of the COVID issues, hesitancy on the part of some to take part due to humanitarian issues is likely to cast a shadow on the overall success of the games.

China has largely dealt with the fallout from the property sector debt issues. Indeed, it has started to stimulate the economy with a rate cut.

US

The US jobs data only recorded 199,000 jobs (for December 2021) when 422,000 had been expected. These data are subject to statistical aberrations and there has been a recent tendency for the jobs data to be scaled up in subsequent revisions. Some wage growth – at around 4% – is starting to emerge. The Q4 growth was very strong at 6.9%.

Some of the GDP growth was due to movement in inventories which might not be expected to continue. However, the consumer segment was unequivocally strong at above 3%. However, the latest retail sales growth of 1.9% did not support that view and raises some concerns for the near term.

Biden is not doing well in the polls and he struggles to get his bills through Congress. Nevertheless, some much-needed fiscal stimulus is getting through. The half-Senate elections are approaching in November, so both parties might be trying to attract the spotlight in these next few months.

Europe

Boris Johnson has been caught out for attending parties during lockdowns. He seems to be brushing the commotion aside. Importantly, the UK is opening up to overseas visitors without vaccinations. Djokovic has a possible berth at Wimbledon!

Russia appears to be on the edge of conflict in the Ukraine. Biden let it slip that he would allow a ‘small incursion’ but not an invasion by Russia. Sometimes it is better to say nothing.

We are not in a position to shed any light on the likelihood of conflict, let alone US involvement. Obviously, any action in that part of the world is likely to spill over into more market volatility. There is too much at stake for either side to be silly. Putin is looking to a ‘president for life’ job. Would sabre rattling help? Possibly, but war might be a bridge too far.

Think beyond the romance this Valentine’s Day

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Whether you’re tying the knot, planning to propose, or declaring your passion for the very first time, February 14 is often a game-changer in the love stakes.

But finding your soulmate doesn’t always mean your financial situations and aspirations are in sync.

Debts or a poor credit rating can be an indicator of financial patterns that will continue to dog your future together.  And at worst you can find yourself saddled with your spouse’s or de facto’s debts long after the relationship has ended.

So, what do you need to be wary of when you’re meshing your financial future with someone?

Number one: understand that you will be 100 per cent liable for any joint debts if you don’t make the repayments. If repayments are not made on a joint mortgage or credit card, the lender can take action against either party and require them to pay back the full amount; and there can be other ways you can be left seriously out of pocket when a relationship ends.

Car loans

If your partner has a poor credit rating you may agree to take out a car loan in your name while the car is registered in your partner’s name. If the relationship ends your ex can take the car and you’ll still be liable for the loan repayments.

On a smaller scale, this can also happen with a phone. You may still be liable for the contract payments while your ex-partner gets to keep the phone.

Rental agreements

Signing a lease for a property in your name only can backfire if your partner leaves and you’re left covering the entire rent.

Drawing down on the mortgage

Your partner may use accumulated extra savings without consulting you.

Using the joint credit card

Unexpected items appearing on the joint credit card.

Unexpected spending 

Using money earmarked for paying bills or debts for other items without your agreement.

Putting assets at risk

Your partner’s gambling or poor financial management may put your share in a home or other assets at risk.

Taking on legal responsibilities 

Being asked to be a director of a company, part of a self-managed super fund, or guarantor of a loan all come with legal responsibilities that can impact your financial future.

So, how can you prevent your partner’s financial habits and decisions from derailing your financial future? For starters before agreeing to any joint arrangement ask yourself how you would be impacted if you split up. Likewise, if you take on a debt on their behalf.

Here are six other actions you can take to protect yourself:

  • Talk to us – we can help you.
  • Make sure you stay informed about your joint finances. Read bank statements and understand how money is being spent.
  • Don’t sign anything without reading it thoroughly and getting advice
  • Ensure joint accounts require both parties to sign for transactions
  • Understand your partner’s business and monitor its finances
  • Register any assets – such as a car or a phone – in the name of the person who is on the loan agreement or contract.

5 New Year’s resolutions for your finances

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The New Year is the perfect time to take a fresh look at your finances.

  1. Start tracking your spending

It doesn’t sound like fun, but if you don’t know where your money goes, it’s impossible to understand your spending patterns and identify habits that are making it harder to achieve your financial goals. With the ability to simply “tap” it often feels like we aren’t parting with our money and we can quickly lose our sense of just how much we are spending and on what.  To get started, try the Australian Government’s MoneySmart budget planner – you might just be amazed at where your money goes!

  1. Do a subscription audit

Do a review of all your subscriptions – whether it be TV, music, shopping, fitness, food delivery services and more, these subscriptions can creep up on us very quickly.  Do a quick check to make sure you are still using all your subscriptions and that they continue to represent good value.

  1. Sort your super strategy

Whether you have your super in multiple places, don’t know where your super is, don’t have super at all yet, or you accessed your super during COVID, it’s time to work out your plan going forward. Super is “super important” and it’s vital that you ensure that you are making the most of your super contribution and not having your balance eaten away by fees.  Make an appointment with us to review your super situation and work out an effective strategy for the future.

  1. Review your home loan

Interest rates have remained at record lows, so if you have a home loan and haven’t already done so, make sure you speak to Presidio Finance Consulting about a more competitive interest rate.

  1. Do a provider review

Are you still getting the best deal from your electricity provider? Or your health insurer or car insurer?  It’s easy to fall into the habit of simply paying our renewals and bills without ever asking the question of whether there is something more these providers can do for us.  For the sake of a few minutes for each provider, it’s certainly worth asking the question!

We are all about helping you achieve your financial goals so if you have any questions please contact us.

Economic Update – January 2022

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Key points:

– The Omicron variant displaces Delta – not as debilitating – but a lot more contagious

– Covid, plus supply chain disruptions, keeping upward pressure on inflation

– Interest rate rises are getting closer in the US — forecasts for 3 rate rises in 2022

– Inflation is a problem but rate hikes won’t help contain it; yet

The Big Picture

It is hard to imagine anyone who was not affected to some extent by Covid-19 during 2021. Everybody was impacted to some degree be it working from home, social lockdowns, access to goods and services or more directly through contracting the virus which has significantly impacted health for many and sadly fatal for some.

This time last year there was a lot of optimism because we now had a vaccine (Pfizer) with distribution getting under way, while others were in late-stage development. Elsewhere the US Capitol building came under attack for extreme elements supportive of outgoing president Donald Trump.

2021 was not plain sailing with many developed countries having to go through lockdowns and other restrictions in efforts to control the spread of Covid. We started 2021 dealing with the Alpha variant of the virus but spent most of the year trying to ward off the more debilitating Delta variant to finish the year trying to manage the apparently less harmful but more contagious Omicron variant. Despite the very high vaccination rates particularly in the developed world, Covid remains very much alive and dominating the community and the economy.

In Australia, major cities went through exhausting lockdowns with consequent effects on the economy (growth was 1.9% in the September quarter) but people responded to the call to be fully vaccinated with gusto. We reached 90% fully-vaccinated on Christmas Day. We also then found out that fully vaccinated wasn’t as effective as hoped.

A UK study demonstrated that 15 weeks after the second injection, protection only amounted to 0% to 20% compared to the unvaccinated. We had been told that we needed to wait six months for a booster. That interval was cut to five, then four, then only three months from January 31st this year – all of these changes were announced in a few weeks!

The good news is that Omicron – at least as we know so far – has been less debilitating than Delta but it is many times more contagious. It would be foolish to take all the new preliminary research at face value but one recent study suggests Omicron infection might make one more resistant to Delta.

One doesn’t need much of a crystal ball to predict 2022 will bring more restrictions from time to time and other strains might rise to prominence. Scientists and medics are now much better prepared than they were last year. Facilities to make the newer vaccines, such as Pfizer, are to be built in Australia and reportedly scientists are working on how to make vaccines more effective for the newer strains.

Israel is contemplating a second booster (or fourth dose). More and more people are coming to the realisation that we may have to live with Covid for a very long time. But we live with the seasonal flu and annual flu shots now and there is reason to hope that the treatment for Covid will eventually become similar to these in time.

We are hopeful that any future Covid-related disruptions in 2022 will not cause a recession and, consequently, we do not anticipate a bear market directly resulting from Covid impacts on either the ASX200 or on developed world equity markets. Our basis for this view is the very high vaccination rate; the availability of boosters; experience in dealing with Covid; and the possibility that Omicron is less debilitating than Delta and might even protect us from it!

To put things into perspective, the ASX 200 rose 13% over 2021. Over the same period, the S&P 500 rose 27%. Historical averages for each of these indexes are around 5%. Of course, dividend payments should be added to those capital gains figures. On the other hand, bond yields and cash did nothing but, in general, 2021 was an excellent year for investors if they had set their asset allocations appropriately for the conditions – and didn’t meddle with them!

For the year going forward, we think Australian and Developed World equity markets may achieve returns in line with their long run averages in the higher single digits. Despite the effects of Covid, equities continue to remain relatively attractive when compared to the yield on traditional fixed interest investments such as term deposits. This aspect continues to provide some support for equity prices.

The US Federal Reserve (‘the Fed’) has started tapering its quantitative easing (QE) programme by reducing the volume of its monthly bond purchases. It now plans to cease bond buying and end its QE by about March 2022. The Fed now expects to increase for Federal Funds rate (official rate) by 0.25% three times in 2022 taking the end-of-year official rate to 0.9%. Our Reserve Bank of Australia (RBA) is continuing its QE programme for the moment – at least until February – but, at time of writing, it is not expected to raise our cash rate until at least 2023 and possibly 2024. In the US, the ‘neutral rate’ of interest is thought to be approximately 2.5%, so the actions of the Fed described above amount to a reduction in the level of economic support as opposed to a tightening of policy. Similarly in Australia, whilst monetary policy remains accommodative, the RBA has no plans to increase the support to the economy but nor is it planning on a reducing it either.

The main economic problem facing most policy makers is inflation. Much of monetary policy in recent years was designed to lift inflation back up to target rates (2% for the US and 2% – 3% for Australia). Australian inflation only just limped into the bottom of the target range in the latest quarterly release. We have no CPI inflation problem – at least not yet.

Jerome Powell, the US Fed chair, has said he has lived to regret using the word ‘transitory’ to describe the inflation situation in the US (and, indeed, Europe). The problem arose as 12 months post Covid becoming a pandemic, prices fell in response to much weaker demand as the world locked down which then formed a very low base for the measurement of inflation. However, as vaccination rates rose and lockdowns eased as the world began to ‘reopen’, demand for goods rose far quicker than suppliers were able to satisfy causing a supply/demand imbalance i.e., disruptions to supply chains. Consequently, prices rose as people bid up the price of goods leading to higher inflation. This is the circumstances that led to Powell calling inflation ‘transitory’ as he anticipated a stronger response from supplies easing inflationary pressures. However, ongoing localised Covid lockdowns have in part resulted in inflation remaining more persistent that initially anticipated.

The other important cause of inflation to emerge was fuel prices. Both oil and gas prices in certain parts of the world jumped for several reasons including inadequate stockpiling. Oil prices eventually fell towards the end of the 2021 but kicked up again in December.

However, the main culprit in the inflation story is the result of ‘supply-chain’ issues. In years gone by, the globalisation of economies led companies to locate the manufacture of certain basic components – like computer chips – in one place. By and large they chose the cheapest location in the world rather than diversifying their sources of supply, which, while lower risk, tends to come at a higher cost.

With manufacturing disruptions due to Covid, shock waves reverberated across the global economy. One of the major problems was with processor chips that have become a key component in so many goods – including cars. Since new cars couldn’t be manufactured at an appropriate rate, demand surged for used cars in the US. A major driver of inflation at 30 year or more highs in the US is the price of a used car! Another casualty of Covid is the price of air travel.

One thing seems certain. These supply-chain issues, which are driving inflation, will not go away by raising interest rates and, so far, there is no major increase in wages from the knock-on effect. In that sense we do not see any official interest rate increases in 2022 as being the start of something bigger. They are merely the start of the return to normality.

Perhaps a bigger worry for the Australian economy is China. China is struggling to assert itself in the world order as it would like. The huge import tariffs placed on China by Trump, and much derided by most at the time, have not been removed or even reduced by Biden.

China tried to disrupt trade with Australia as a punishment for our support for the US request for the World Health Organisation (WHO) to investigate the source of Covid. Over a year ago, it stopped accepting coal (and many other) imports from Australia, notably not iron ore. But the recent cold start to the Chinese winter caused them to take our coal exports out of bond! There is no doubt that the China economy has slowed in recent months. In normal times, China would just add stimulus but there is now an additional problem for them to address.

Evergrande, a massive property development company in China, got itself into debt problems in late 2021 and it has since defaulted by failing to make some coupon (interest) payments on its debts. China is afraid that stimulus at this time might cause too lax an attitude in the property sector and it is trying to walk a fine line balancing debt responsibility with growth for the rest of the economy.

While much was expected from a Biden government after the Trump years, hope has at least partially been dashed. A recent poll put Biden as the most unpopular US president on record in his first year except, of course, for Trump. The new catch-cry of ‘Let’s go Brandon’ – a euphemism for a negative sentiment against Biden – has become rooted in modern American culture.

Biden did get a big infrastructure package through Congress but an even bigger package for more general economic and climate purposes keeps stalling. Law makers are rightly worried about adding yet more trillions of dollars to the national debt. With interest rates close to zero, debt is not currently a great issue. When rates start to climb, the debt pile could severely hamper future US growth as debt servicing costs will increase with interest rates. The Fed is unlikely to want to contribute to this problem and so will not raise rates without due caution.

To us, 2022 looks like a transition year in the return to normal conditions. Low rates underpin reasonably strong equity markets; rates are unlikely to rise enough to cause problems; and we are getting on top of living with covid, if not eliminating it.

We expect ‘bumps’ along the way in equity markets; we always do! There are more than enough known causes of future bumps to warn prudent investors to be ready to ‘ride the waves’ in 2022 rather than sell in the dips. It is never too soon to evaluate the appropriateness of an investment strategy and allocate capital accordingly.

We are yet to mention the Australian Federal election! Although it is likely to be very soon (certainly before the end of May), both sides float policies at first to see which resonate with the electorate. Only then do they come up with the final package of ‘promises’.

Either way, both sides will be keen to stimulate the economy, and neither is likely to come out with a left-of-field policy such as the big changes to super put forward last time around; and besides, it would be hard to enact any major policies before the end of 2022 that would derail what we think will be a solid but not spectacular year for the local economy and markets. We will comment on the election when we have seen what is at stake.

Asset Classes

Australian Equities 

The ASX 200 had a strong month (+2.6%) after it got over the Omicron wobbles. Utilities (+6.9%), Materials (+6.4%), Financials (+4.3%) and Property (+3.8%) were the strongest performers over the month. IT (5.2%) was the big laggard.

Over the year 2021, Financials (+20.2%), Property (+21.5%) and Telcos (+34.0%) were the above-average performers. There was no particular theme (such as growth, value, etc) that performed consistently. It was a tough year for some fund managers.

We have the ASX 200 currently priced at about fair value. Our forecast for the year ahead is a little above average. With the impact of Covid still quite uncertain, and central bank’s likely to tighten monetary policy by increasing interest rates, there may well be some wobbles along the way which could present buying opportunities. The next company reporting season beginning in February will be keenly watched for how companies are seeing their respective futures.

International Equities

December was a very strong month (+4.4%) for the S&P500. The VIX ‘fear index’ at 17 is only just a little above average but our mispricing signal suggests that the index has run a little too hard.

Without a mispricing correction we see a slightly above average 2022 for the S&P500 but that forecast is somewhat lower when we subtract our estimate of over-pricing.

The S&P500 had an extremely strong year (+26.9%) in 2021. It far surpassed that of the ASX 200 (+13.0%) and other major indexes. Emerging Markets, largely due to China, went backwards (3.0%) in 2021.

Bonds and Interest Rates

The Fed closed its December meeting with a statement that both sped up the tapering of their bond buying program and brought forward the next cycle of interest rate hikes. Both were met with enthusiasm by Wall Street.

The RBA no longer mentioned 2024 as the probable start to rate hikes – but it didn’t have the fortitude to mention 2023 either. With no measurable inflation pressures (yet) there is no reason for the RBA to try and get ahead of the game.

But The Bank of England couldn’t wait any longer. It hiked from 0.10% to 0.25% in its first upward move in three years. It did this in response to higher inflation data and it obviously doesn’t agree with us that rate hikes won’t cure supply-chain and energy price problems.

The Australian 10-year government bond yield peaked at 2.09% at the end of October but finished the year at 1.67%. Well up from the circa 0.80% of 2020 but still well below the 2.65% of 2017 and 2018.

Other Assets

The prices of oil ended the month sharply higher after the previous month’s steep declines. But oil prices finished the year well below the 2021 peaks.

The price of gold was rather flat as was that for copper.

Over the course of 2021, copper and oil prices were very strong. The price of iron ore was down sharply over the year but rallied somewhat in December. The price of gold was down 4.0% over the year, after having fallen to just over $US0.70, our dollar drifted back up to just above where it started the month – at $US72.7.

Regional Review

Australia 

The Australian economy September quarter Gross Domestic Product (GDP) growth at 1.9% was much better than expected and a rebound is expected in the December quarter as restrictions were starting to lift through the period.

Residential property prices surged another 5% in the recent quarter making for a 21.7% gain over 12 months.

Our unemployment rate fell back from 5.2% in the previous month to 4.6%. A massive 366,000 new jobs were created but that only brought total employment back to where it was before the start of the lockdown in July. There are no serious signs of capacity constraints in the Australian economy yet.

The government is currently leading in the polls on key aspects, but the electioneering isn’t quite in full swing yet. Despite our massive national debt, neither side seems likely to propose anything but a bit more stimulus. It is important for the economy to keep the momentum going. Any tightening at this point could lurch the economy into very slow growth – or worse, a recession.

There seem to be some moves to simplify testing for Covid for interstate travel. The queues in certain regions were totally unreasonable. And testing everyone who wanted to travel probably took testing away from people who really needed it because of sickness. A solution seems to be near at hand.

China

Last month we wrote that China’s economy may have turned the corner. That seems to have been a premature conclusion.  The latest retail sales were only 3.9% against a modest prediction of 4.6%. Industrial output at 3.8% was slightly ahead of expectations. China needs to move on from the Evergrande affair and guide its economy to stronger growth.

US

The US jobs data weakened again to only 210,000 new jobs from 546,000 in the previous month; expectations were for 573,000 new jobs. The unemployment rate fell to 4.2%. Retail sales were a big miss at 0.3% as 0.8% had been expected.

The final revision to September quarter GDP growth improved from the earlier estimate; 2.1%, to 2.3%; but it was the inflation picture that disappointed.

Consumer Price Index (CPI) inflation was up 6.8% but that reduced to 4.9% when volatile items such as fuel and food were stripped out to produce the ‘core’ reading. The ‘wholesale’ measure of price inflation came in at 9.6% the highest level since 1982 however, the Fed’s preferred ‘core’ Private Consumption Expenditure (PCE) inflation measure came in at a more respectable 4.7% for the year.

For inflation to stay high, prices must keep rising and not just lift from one level to a new higher level. We expect inflation in the US and elsewhere to drift back to levels near targets as the year progresses.

Europe

Europe has been hit particularly hard by Covid with many countries in some form or other of lockdown. Britain has so far avoided the inevitable. Plan B from Boris Johnson is expected shortly after New Year’s Eve. Masks are already back in vogue.

UK inflation came in at 5.1% from 4.2% and the Bank of England lifted its rate from 0.1% to 0.25% for the first hike in three years.

Rest of the World

 Turkey, facing inflation of over 20%, cut its central bank rate and its currency – the Turkish lira – dropped sharply.