Cloudbreak Market Wrap 4Q 2021
It was another positive quarter for equity markets globally, rounding out a very strong calendar year. Market returns for the period were as follows:
Before we go on, it’s worth mentioning the disparity between Australian market returns and the US. Once again this highlights the importance of investment outside of our home market. Significant outperformance of the US market aside, there’s also the diversification benefits, which should always be a priority for portfolio construction.
The market was still very much inflation-focussed, as this is probably the biggest factor influencing central bank policy globally. The next interest rate moves both here and in the US will almost certainly be up, it’s just a matter of when.
To give some context, US inflation for the month of November surged to 6.8%, while the long-term target of the US Fed is 2%. It is also the highest level since 1982.
In late November, US Fed Chair Jerome Powell commented that it would be appropriate for the Fed to conclude their bond-buying program earlier than anticipated. Initially this sent markets down, since it means there won’t be the seemingly endless supply of money into the economy at the same rate.
For those interested in exploring US inflation in more detail, the US Bureau of Labor Statistics has a wealth of information on their website at https://www.bls.gov/cpi/
For Australian inflation data, refer to https://www.rba.gov.au/inflation/inflation-target.html
In Australia, the official CPI figures have our inflation running at 3% p.a. against the RBA’s long-term policy of a 2-3% range. Of greater concern for the RBA though, is the pace of inflation and upward pressure, and how they curb that. The most obvious tool in their kit is interest rates.
Interest Rates – Where to From Here?
While interest rates tend to act as a form of gravity on asset prices and markets don’t like them rising, it’s important to remember that they rise because the economy is surging. Thinking more broadly on interest rates, consider that Australia has not seen a rate rise in over ten years. There is probably a healthy percentage of borrowers paying off their homes who have never felt the pinch of a rise in their variable mortgage rate. Time will tell if this impacts the trajectory of property values in Australia greatly.
Corporate earnings were solid again this quarter, however, supply constraints due to Covid have been a headwind to overall productivity. This has been another factor influencing inflation. With rising rates on the horizon, balance sheet strength and responsible levels of leverage should be examined closely.
Looking ahead to the next twelve months, one would assume there should be some market volatility around significant economic events. Hopefully central banks can get inflation under control without the need for drastic monetary policy measures. We are also now in an election year in Australia, so there will be plenty of noise around that. As mentioned above, balance sheet strength and responsible gearing becomes even more important when assessing individual companies in a rising interest rate environment.
As always, the aim is to make sure you own quality companies with reliable and growing cashflows, quality management and sustainable competitive advantages.
Until next quarter – onwards and upwards!
General Advice Warning: Any advice given herein is general in nature and has not taken into consideration your personal financial objectives, situation or specific needs. You should consider the appropriateness of the advice as it relates to you before acting upon it. Where a specific product has been mentioned, you should always consult the PDS before making any investment decision relating to it.