This year the Australian markets started without a new year hangover, bouncing back up to November 2020’s highs in January – although it took the ASX just over a year to recover from the April 2020 low, when we first learned that a global pandemic wasn’t just a fictional movie plot.
The ASX finally beat Feb 2020’s previous all-time high in May 2021, and it was a relative bull run from there straight through to August – with eleven months of gains in a row. September’s slide was relatively classic, while the market has struggled to regain its footing into the silly season, with talk of the US debt ceiling and impending inflation putting a dampener on high spirits.
Since Q2 2020’s big dip in demand thanks to everyone being indoors, oil’s managed to squeeze supply through coincidence (Ever Given, Hurricane Ida) and architecture (production cuts) despite oversupply caused by a price war between Russia and Saudi Arabia, as the world heads back to previous levels of consumption.
Iron ore peaked in May 2021 at record highs, fuelled by Chinese steel production for construction and manufacturing material. The Chinese government then stepped in to reduce price inflation, curbing output from steel mills and property construction. Iron ore subsequently crashed in July, reaching a low in mid-November. Affected securities include ASX 200 heavyweights BHP, RIO, FMG, CIA and MIN.
Creeping up earlier in the year, inflation came to a head during the later months; initially brushed off as ‘transitory’, central banks are now beginning to take the matter more seriously. Lockdowns are finishing up people are out and about spending money. The underlying issue is global supply chains, which are still in disarray and can’t keep up with demand. Central banks are rolling back stimulus and looking to increase interest rates, to reduce borrowing by making it more expensive. Price inflation increases the profitability for some companies and reduces it for others. Energy (oil and gas) and gold are beneficiaries, while debt-laden sectors lose out (small caps, tech, healthcare).
The banks had a great first three quarters of the year. Valuations were still relatively low as their COVID recovery took longer than other sectors. The S&P ASX Banks Index rose 24% in the eleven months from 10 December 2020. By the end of November 2021, the index had fallen back 10% – with a total gain of 14% over the period. The main laggards have been the Commonwealth Bank (ASX.CBA) and Westpac (ASX.WBC); both companies had underwhelming yearly results. Despite decent cashflows, both banks noted increased cost pressures on their net interest margin, which is a bank’s lifeblood.
The net interested margin is the difference between the interest rate that banks borrow money in bulk and how much interest they charge lending money to businesses and retail (home loans, car loans, etc). Increased competition in the home lending and SME lending space has led many analysts to take a bearish view of the stocks, and they’ve been downgraded by several key institutions (Macquarie, Goldman Sachs, Morgan Stanley). Smaller caps, Bank of Queensland (ASX.BOQ) and Bendigo Bank (ASX.BEN), look to have been dragged down by what happened to the larger players.
Travel stocks have had a turbulent year and were one of the sectors hit hardest by COVID, with some of the most volatility this year. Valuations were made at the whim of comments from state leaders, mostly NSW given Sydney’s international airport. Modest gains were made in the earlier part of year before a huge spike in August as vaccination rates began to increase, lockdowns were lifted, and rumours of international travel began to surface. Flight Centre (ASX:FLT) saw the most action, jumping 78% from August to October. Sentiment was severely overcooked however, and travel stocks were starting to nosedive by the time we got to November. It became apparent that cashflows would take a long time to recover and that vaccination rates need to be high globally for international travel to resume in earnest. The death blow came from news of the Omicron variant, and fears of another lockdown. Global travel has been severely dampened and valuation with it. Flight Centre saw a 46% change in price over the year and dropped 27% from October to December; Qantas dropped 14% year-on-year, while Webjet descended 18%.
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