Investment Matters

What mattered in FY-21

After a whirlwind year, the Australian market delivered a return of 28.5% (S&P/ASX300 Index).

16 months on from lockdown measures being instituted – the market is now 9% ahead of its previous peak.

Strong intervention by government and central banks saw the market through the worst and through to recovery.

The magnitude of the rebound we witnessed is evidenced below: the All-Ordinaries Index saw the largest return it has seen since 1987.

All Ordinaries

Above: Top 10 returns in the history of the All Ordinaries Index (XAO)
Source: IRESS, First Samuel

What drove the rebound in the market this year?

We provide a recap of the stories that Mattered this year.

Monetary policy: Cheap money abounds.

As COVID hit around the world, central banks responded with a level of support that dwarfed what we saw post-GFC.

Short term interest rates were cut, while asset purchases accelerated: pinning both short- and long-term interest rates to historical lows, ensuring broad access to credit was maintained.

This had several impacts that shaped the market:

  • A new era for banks?. Cheap funding supported banks, who were able to pass rate cuts on to consumers. Loan books were also bolstered by government support measures (such as JobKeeper) and regulatory relief, which significantly reduced the risk of loan defaults.
  • “Builders can’t build homes fast enough”. Residential property markets boomed with cheap loans driving loan growth. This manifested in strong housing activity, particularly in Australia and the US, with loan growth accelerating sharply.
  • M&A activity on the rise. Cheap funding strengthened balance sheets and cheap prices drove deal activity across the market, with takeover bids launched for several companies including Crown, Asaleo Care, Boral, Altium and Link Group.

Rates have been underpinned by strong central bank support

Bond Holdings

Source: RBA, Refinitiv, Central banks

Fiscal policy: A license to spend

The crisis gave governments a ‘license to spend’.

The government stepped in, in a big way during COVID, supporting businesses and households through various measures including support payments.

Driven by this support, and the deferral of spending, households began accumulating savings at a staggering rate. We also saw these savings channelled into various areas of the economy and markets with dramatic effects.

This manifested as:

  • Employment, support and policy. Direct action from the government and the banking system helped attenuate the direct risk of dislocation of workers. This resulted in a sharp contraction in the unemployment rate and an improvement in hours worked.
    With the economy recovering, we also saw a jump in spending on goods, as improving confidence and an accumulation of household savings were channelled towards discretionary items.
  • The Federal Budget: still on Team Australia. In short: there were bigger budgets. ‘Emergency spending’ by governments snowballed into a more general social license to spend, as talk of ‘debt and deficits’ was put aside. We saw large budgets and proposals for spending announced by both sides of government, both domestically and abroad.
  • Retail investors take the reins. We saw strong activity (as well as some very strange activity) in pockets of the market as household savings were channelled into the market. This included cryptocurrencies getting a ‘second wind’ after their inexorable rise in late 2017.
The fiscal response to COVID has dwarfed that in previous downturns.
Budget balance
Source: Australian Treasury

Depression? Recession? Disinflation? Reflation? Inflation?

Such was the variance in opinion about where the global economy was heading at the outset of the year.

From staring down the barrel of the next ‘great depression’ to a rapid rebound in activity, many areas of the market and the economy have been caught off guard.

  • Overclocked: technology stocks. We saw Technology stocks shoot skywards as we began the year. Strong balance sheets, tailwinds from COVID and the promise of strong growth in a perceived disinflationary, low growth future attracted investors.
  • International Equities: a cosmopolitan tilt. We became increasingly concerned that the rally was concentrated in only a handful of technology names and took the opportunity to reposition clients’ international allocation during this time.
  • Winners and losers in November. With the successful development of several vaccines, and vaccination programs instituted globally, we have subsequently seen a rotation out of these ‘growth’ names, into companies poised to benefit from a recovery in activity – or ‘value’.
  • Shock and Ore. The sudden rebound in demand came to a head with constrained supply. This manifested in higher prices across commodities, both soft and hard and a range of goods. Semi-conductor prices soared, lumber was in short supply and shipping prices exploded.
  • One wedged Ship and a few timely reminders. Supply issues and escalating geopolitical tension led the world to reconsider the importance of domestic sources of supply and question the fragility global supply chains have bred.
  • No more “Goldilocks” returns in bonds. Long term interest rates hit an all-time low as the pandemic took hold. With an improving outlook as countries re-opened and inflation expectations lifting, yields began to rise. The Australian 10-year government bonds rising from lows of 0.6% in March 2020 to a high of 1.84% in March of 2021.
As economies have reopened, inflation expectations have rebounded (US)
Inflation expectations
Source: Bloomberg, Macquarie Research