A year in markets: EOFY 2022

As the EOFY parties kick off it’s time to look back on the year that was. FY21/22 saw a record high of 7,362 points for the XJO in early August 2021, capping off a magnificent post-pandemic bull run. The long-term effects weren’t felt until later though, with the market hitting a low of 6,407 in late June; a 13% fall from grace. 

The sideways market in between was marked by war in eastern Europe, supply chain bottlenecks and inflation, culminating in Australia’s first interest rate rise in 11 years... followed by another two weeks later. 

S&P/ASX 200 (XJO.ASX) in FY22

Commodity prices in FY22

Iron ore

As the largest sector of the Australian equity market, commodities understandably saw the most action. First came iron ore, which fell off the cliff after the big players paid out their end of financial year dividends. In order to hit climate change targets, Chinese government curbed factory outputs which in turn reduced orders of Aussie iron ore. 

Demand expectations were wiped out. 

Fortescue Metals (FMG.ASX) shed 47% between early August and November, while Mineral Resources (MIN.ASX) lost 42% and Champion Iron (CIA.ASX) lost 47% in a similar time frame. Christmas came with a rally into December with factories having a little room to spare with output quotas.

Fortescue Metals (FMG.ASX) stock price in FY22

Oil and gas prices in FY22 

The resurgence coincided with another commodities rally: oil and gas. It started with a shortage of energy for the northern hemisphere, thanks to adverse weather in key export locations which were on their way into winter. War in eastern Europe followed, which included the largest global exporter of oil and gas, and the rally kicked into overdrive. With a squeeze in supply, crude jumped above $120 a barrel. Australia and many other smaller producers were (and still are, as you’d know if you filled up your car recently) tasked with filling the gap in supply. Santos (STO.ASX) was 24% higher, Woodside (WDS.ASX) 54% and Beach Energy (BPT.ASX) 50% before a late June market slide.

Woodside Petroleum (WDS.ASX) stock price in FY22

Grain prices in FY22

In addition to your winter porridge, grain is a key component of cattle, sheep, and chicken feed. With Ukraine as the fifth largest grain exporter (accounting for about 10% of global supply), the emergent domestic situation obviously impacted business as usual. Adding fuel to this fire was India (ranked eighth in global grain trade) announcing a ban on exports due to a heatwave in their wheat producing belt. Premiums were stacked on to Australian exporters, with the likes of GrainCorp (GNC.ASX) returning 88% for the year. 

GrainCorp (GNC.ASX) stock price in FY22

The banks in FY22 

The banks moved slower than other sectors in 2020 but posted a steady and strong return well above their pre-COVID valuations. Inflation and rising interest rates led to an exceptionally volatile FY21/22, capped off with a final selloff in early June. The selloff coincided with an official rate rise from the RBA. Although higher interest rates typically result in a wider net interest margin spread, they also cause higher restrictions on lending and higher rates of default. The lending sector has also become highly competitive thanks to the previous record low rates, meaning the big four are having to compete with more players in the lending market. The ASX 200 Banks index finished the year down 11%.

ASX 200 Banks Index (XBK.ASX) stock price in FY22

Technology

As commodities returned to their historic form, so did technology. The Information Technology Index (XIJ.ASX) hit a record intra-day high at 2,450 in late August, only to finish off the financial year at 1,338, a 45% drop. Of all the ASX sectors, technology is the most exposed in a rising interest rate environment. As inflation pushed higher into Christmas and the revelation finally came that it would not be transitory, technology stocks were quickly revalued, even without an official rate rise announcement. 

The Information Technology Index (XIJ.ASX) stock price in FY22

How stock valuations change with rising interest rates

The most common form of stock valuation is the discounted cash flow model. The model is discounted based on the (nearly) risk-free borrowing rate. The discount becomes larger if growth is expected to be larger (i.e. an established company with low but steady growth rates will be discounted less than new company looking to quintuple its size in the next five years). This means smaller high growth companies are at risk to even fractional movements in the RBA’s borrowing rate. With expectations of aggressive rate rising to combat out of control inflation, technology companies and their shareholders drew the short straw.

Is the Australian stock market doing well?

It can be hard to see the forest for the trees of red, so i's important to look at a worldwide view to gauge if the ASX is doing well in the grander scheme of things. 

Every global economy has had to deal with inflation and rising interest rates, and every global equity exchange is in the red. Compare our ASX 200’s measly year-on-year fall of 10% to the 14% fall of China’s CSI 300, as well as the 15% fall for Europe’s STOXX, 20% fall for the US NASDAQ and 22% fall for Brazil’s IBOV. 

So what next? There's no shortage of theories floating around on what the next turn will be, or when we will finally hit the bottom. Only time will tell who has it right. 

Movers and shakers

Check out what Openmarkets investors where buying up in the last half of financial year 2022. 

The movers and shakers for the first six months of 2022


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