2021 in review
What a year 2021 was.
We’re not sure how, but we have made it to the end of another very strange year.
A year that has been full of incredible moments as well as plenty of sad ones.
For some, they lost loved ones and spent their first Christmas without them, whilst others were having their first Christmas with new additions to their families.
We hope you’re feeling as joyous as we are about bidding 2021 farewell.
While we may not know exactly what’s around the corner (especially knowing that the COVID cases are rapidly rising), no matter what 2021 dished up, the idea of a new year is still an exciting time, as many of us begin to dust ourselves off and look to make some changes for the better.
The review of 2021
A snapshot of the investment markets, illustrates that regardless of where your money was invested you benefited from taking the risk and were rewarded with double digit returns.
Taking a dive into the investment space, it was a great year across the board:
Aussie Shares up 11.87%
International Shares up 15.11%
Residential property 22.2%
Bitcoin up 73.22% (despite dropping 18% over the past month)
Cash 0.10%
Just as 2020 was dominated by coronavirus so too was 2021. But 2021 turned out to be a far better year for investors.
The big negatives of 2021 were of course dominated by coronavirus:
Coronavirus mutated into more transmissible variants, drove 3 new waves of cases globally, saw more cases & deaths than in 2020 & saw long lockdowns in east coast Australia.
Inflation in the US and some other countries rose to levels not seen in decades as the pandemic drove a surge in demand for goods, but left supply struggling to keep up.
Related to this energy prices – notably gas in Europe and coal in China – surged as a result of energy shortages.
Bond yields surged and many central banks moved to reduce monetary stimulus (by slowing bond buying) and some actually raised interest rates.
Chinese growth slowed sharply as a result of policy tightening and an associated property downturn.
And there was plenty to distract long term investors with meme stocks, cryptos and SPACs attempting moon shots and calling into question traditional ways of investing. We have seen it all before though, but cryptos (or rather blockchain) remind us that technology is a regular disruptor, there is lots of spare cash & many are happy to speculate.
However, despite the dominance of coronavirus and other sources of worry and noise there were significant positives:
Science and medicine started to get the upper hand against coronavirus: vaccines were rolled out with 55% of the global population (75% in developed countries) having had a first dose substantially reducing serious illness; and several new treatments further holding out the promise of reducing serious illness from covid.
This in turn enabled an easing in restrictions (or gradual reopening) albeit it was like 2 steps forward and 1 back.
Fiscal stimulus, pent up demand and ultra-easy monetary policy helped support household and business spending.
As a result, global GDP is expected to have grown nearly 6% in 2021, This in turn underpinned strong gains in profits and dividends. As a result, investment markets also performed better than feared, despite covid, higher inflation and higher bond yields.
Global shares had a few pullbacks as a result of covid and inflation fears, but they were relatively mild and stocks were boosted by strong profit growth, low interest rates and optimism vaccines would allow a more sustained reopening.
However, US shares remained a surprising outperformer
Australian shares underperformed with tensions with China not helping – but they actually did better than most expected.
Government bonds had poor returns as yields rose as central banks moved towards the easy money exits.
Home prices surged thanks to ultra-low rates, incentives and FOMO. That said, monthly price gains have slowed.
Cash and bank term deposit returns were poor.
After rising to our end 2021 forecast of $US0.80 in February the $A fell as the iron ore price fell, the Fed became more hawkish and China tensions persisted.
The outlook for 2022
First the bad news
Uncertainty over covid remains high and a new variant (Omicron or another) could cause an upset; inflationary pressures will be high for a while; the Fed is expected to raise rates three times; the RBA is expected to start hiking in November taking the cash rate to 0.5% by year end as the conditions for higher rates (inflation sustained in the target range, full employment & a 3% pace in wages) are likely to have been met; and political risk may have more impact.
In terms of politics
The mid-term elections in the US will likely see the Democrats lose control of Congress; French and Australian elections have potential to cause volatility (although Macron is ahead in France and the policy differences between the Government and ALP in Australia are minor compared to 2019); and tensions with China (over Taiwan), Russia (with a risk that it undertakes an invasion of southern Ukraine) and Iran (over its nuclear ambitions) are likely.
Optimism
However, there is good reason for optimism about continuing economic recovery in the year ahead.
First, while coronavirus remains a threat it appears to be having a far less negative impact on economies as vaccines and treatments get the upper hand. While uncertainty remains around Omicron and booster vaccines may need to be tweaked – it appears to be more transmissible but less deadly and if this is confirmed and if it comes to dominate other variants it could help hasten a progression to learning to live with coronavirus like the flu.
Second, excess savings of around $US2.3trn in the US and $250bn in Australia will provide an ongoing boost to spending.
Third, while monetary policy will start to tighten it will still be easy. Some easing in inflationary pressure as production increases and consumer demand swings back to services will provide central banks with breathing space and rate hikes in Europe and Japan are still years away. It’s usually only when monetary policy becomes tight that it ends the economic cycle and the bull market in shares and that’s a fair way off.
Fourth, inventories are low and will need to be rebuilt which will provide a boost to production.
Fifth, positive wealth effects from the rise in share and home prices will help boost consumer spending.
Sixth, the Chinese Government looks to be becoming more focussed on boosting growth, so more policy easing is likely.
Finally, while business surveys are down from their highs, they remain strong consistent with good growth.
Overall global growth is likely to be around 5%, down from 2021 but still strong.
In Australia, recovery from the recent lockdowns supported by excess saving, strong business investment & high confidence levels suggest growth of around 5.5%. This is likely to support profit growth albeit at a slower pace than in 2021.
Implications for investors
Global shares are expected to return around 8%
but expect to see the long-awaited rotation away from growth & tech heavy US shares to more cyclical markets in Europe, Japan & emerging countries. Inflation, the start of Fed rate hikes, the US mid-term elections & China/Russia/Iran tensions are likely to result in a more volatile ride than 2021. Mid-term election years normally see below average returns in US shares and since 1950, have seen an average top-to-bottom drawdown of 17%, usually followed by a stronger rebound.
Australian shares are likely to outperform at around 10%
helped by stronger economic growth than in other developed countries, leverage to the global cyclical recovery and as investors continue to search for yield in the face of near zero deposit rates but a grossed-up dividend yield of around 5%. Expect the ASX 200 to end 2021 back around 7,800.
Australian home price gains are likely to slow
with prices falling later in the year as poor affordability, rising fixed rates, higher interest rate serviceability buffers, reduced home buyer incentives and rising listings impact.
Cash and bank deposits are likely to provide very poor returns,
given the ultra-low cash rate of just 0.1%.
Bitcoin is likely to provide volatile returns of an unknown quantity
Summary of investment outlook
With all that being said, the goal of any investor is the highest possible returns.
But we believe the blind pursuit of outperformance isn’t always the way to deliver a goal.
The chances of getting assessments/ predictions right at this stage remain problematic, so diversification and risk management are key.
We believe maximising returns over time is about getting the balance right between opportunity and defence. That’s why our investment philosophy is built around an agile process of understanding and capitalising on investment opportunities while also managing risks, both known and unknown.
Newcastle Advisors Year in Review
Despite the disruptions, there were still a number of highlights for 2021:
We supported so many new families that we welcome to our community.
We have supported many people retire this year, that will not be returning to work after the Christmas holidays, instead having their income replaced allowing them to enjoy time with their families and loved ones.
We have supported several clients make the complex seem simple (plans and options for those disabled, suffering from mental health, and moving loved ones into care).
We are set to move into new premises in 2022, we will still be staying in Warners Bay, but have secured our long term future.
We have some ambitious goals this year, that we would love your support with:
Opening our books to help more people each month.
In talks with a gun financial advisor that specialises in cashflow management to help those seeking support with building their wealth.
Being more accessible
Building our team to increase our capacity to help support more people.
If you have any friends or family that may benefit from our financial advice, whether they are starting out, looking to get ahead or considering retirement, please reach out as we would love to support them.
Update from Matt
2021 was a huge year for our family.
My wife, Bec went back to work full time after taking a few months off after the birth of our son.
Harry (18 months old) started daycare, started walking/running, and it has been unbelievable to watch his cheeky personality grow.
We also sold our project home during the pandemic and at the height of the property boom. We achieved a fantastic result, until we had to buy in the same market. hahaha. Watching the runaway property market was a scary experience. It is one thing to advise clients on what to do, it is another thing doing it yourself and understanding the emotions (and that of your wife) that go along with it.
We also meet some unethical real estate agents, and some amazing ones (if you are buying/selling in Newcastle reach out for some recommendations).
We are enjoying our new home, that has a pool and spa that Harry is enjoying, and a flat backyard that he is learning to mow with me.
For our existing clients, we will be in contact in January to arrange a time to see you in the first quarter of the year.
We will look to re-set your goals for the year, update your financial position, and realign your investment portfolios to ensure you are positioned to take full advantage of the opportunities when they arise.
However, as always, if there is something more pressing, please do not hesitate to contact me personally on 0410 581 424 or mmccabe@newcastleadvisor.com to arrange a phone call, zoom meeting or face to face appointment.
Thank you for your continued support and we wish you & your family nothing but health, wealth and happiness for 2022.
Matt McCabe
Director/ Financial Advisor
Newcastle Financial Advisors
*Market outlook provided by AMP Shane Oliver
https://www.amp.com.au/insights/grow-my-wealth/Olivers-insights-review-2021-outlook-for-2022-recovery-to-continue-as-we-hopefully-learn-to-live-with-covid