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December In Review: Equities Stage Strong Finish

Australia | Jan 13 2022

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Equity markets set aside omicron fears to charge ahead in December, capping a strong year and jockeying for pole position in 2022.

-The ASX200 rose 2.75% during December
-Investor focus snaps back to 'Value'
-Utilities the best performer, and Tech the worst
-Focus switches to Mid-Caps
-2021 in review
-More gains forecast for 2022

By Sarah Mills

The ASX200 rallied in the closing weeks of 2021, adding 2.75% in December to 7,444 points on respectable turnover, breaking a three-month losing streak and capping a solid performance for the year overall.

All up, the ASX200 gained 13% in 2021 (17.3% total return, including dividends), thanks to strong performances from the Financial and Resources Sectors.

All sectors made headway in 2021 save the Technology sector, which delivered on balance a negative return for the full year.

Key December Takeaways – Markets Ignore Omicron

Omicron dominated headlines in December, pinging supply chain nerves and generating increasingly hawkish inflation stances.

But markets largely ignored the brou-ha-ha, the MSCI World Index hitting another record in the final days of 2021 to gain 3.9% in December.

Morgan Stanley highlights 'Value' returned to favour in December, the omicron covid outbreak skittering a three-month revival in growth stocks.

For the first time in months, MSCI Value outperformed MSCI Growth by 4%.

Strong swings were recorded across sectors.

Utilities led the pack thanks to soaring domestic gas prices, up 7.9%, followed by Materials – up 6.5%, although Morgan Stanley notes that Financials and Materials contributed most to overall returns.

Technology and Consumer staples posted the strongest numerical falls, with Technology and Healthcare delivering the poorest returns.

Morgan Stanley notes investors switched focus to Mid Caps in December, and Resources outperformed Industrials across the board.

The AUD rose 1.9% in December, to top the tables, limiting the total retreat for the year against the greenback to -5.6%.

House prices continued to gain ground in in December and the pub barometer was smoking, every man and his dog punting on the next region to run, and the bears prognosticating on pullbacks. 

Household debt to income hit 184.6% in December while the debt-service ratio declined.

Morgan Stanley notes household debt is higher than government debt and more at risk of sustained deleveraging.

The ASX200 edged out the Small Ordinaries in December, the Small Ordinaries Accumulation Index adding 1.4% for the month.

Real Estate proved the best performer in the index for December, up 5.9%, while consumer staples rose 5.5%, and energy 5.3%.

Meanwhile, China’s benchmark Manufacturing Purchasing Managers Index (PMI) rose in December to the highest levels since July/August.

JP Morgan notes the December Caixin PMI rose 0.2 points to 50.3 points, suggesting a recovery in production and an easing in supply constraints. 

The output component hit its highest level in a year.

The outlook is less positive for the global services industry, which is battling pressure from omicron. Global services sector PMIs fell sharply in December.

JP Morgan notes that globally, December PMIs point to loss of momentum with inflation moderation likely. 

The global analyst expects GDP and CPI to moderate to below 3.5% this quarter.

On the sentiment front, Morgan Stanley reports risk appetite meandered at lower levels in December and volatility in equities peeled off towards the end of December as policy uncertainty eased. Of course, we know now this changed quite suddenly as soon as the fresh calendar year had started.

Snapshot Of 2021

For the whole of 2021, the ASX200 rose 13% (ex-dividends), double the 30-year annual average of 6.7%. In the US, the S&P500 gained 30%.

Morgan Stanley observes share price strength in 2021 was coupled by a retreat in price-earning multiples, which eased from 19.7x to 17.9x, thanks largely to strong performances from resource stocks.

Price-earnings multiples for Industrials, ex-Financials, inched up to 30.1x.

Among stocks, Commonwealth Bank ((CBA)), BHP ((BHP)) and National Australia Bank ((NAB)) were major contributors while CSL ((CSL)), Afterpay ((APT)) and Woolworths ((WOW)) were the biggest detractors.

The broader All Ordinaries Index underperformed.

The broker notes EPS revisions rose most for outer years, FY21 trailing and FY22 struggling to keep up with the pack, as covid and inflation fears continued to dog the market.

Materials and Energy enjoyed the biggest upward revisions, while Utilities, Staples and Industrials lagged. Technology seriously trailed the pack. 

2021 – The Year For Energy and Resources

Resources proved the star performer in 2021 and most analysts expect support to continue to some degree in 2022.

Coal was the stellar performer in 2021. Hard coking coal won the year amongst bulk commodities, rising 32.3% in December to take the annual gain to 158.8%.

Among energy commodities, thermal coal clocked another 11.6% in December, taking its annual gain to 110.7%.

Meanwhile, the Australian Energy Regulator has engaged in a stoush with the Australian Energy Markets Operator, challenging the latter’s prediction of early retirement of coal plants.

Among LME metals, zinc rose 10.4%, taking it to the second strongest performer in 2021. Aluminium rose 7% in December taking gains to 41.8%, (the biggest gainer for the year).

2021 And The Yield Perspective

Interest rates, inflation and the yield perspective dominated markets in 2021. 

Growth took a back seat to value as investors eyed a more hawkish US Federal Reserve and supply chain shortages kindled inflation.

Household incomes rose at the fastest pace in 13 years in the September quarter, thanks to stimulus, while savings rose sharply. 

The covid-induced September GDP decline remained one of the sharpest in history, but it generally outpaced forecasts.

A natural gas supply shock accounted for part of the swing in inflation.

Meanwhile, globally, the December quarter revealed a sharp bounce in factory output and US inflation data, Morgan Stanley reporting that global GDP and Consumer Price Index inflation tracked near 6% – one of the largest nominal GDP gains in decades.

JP Morgan takes this as an encouraging sign that supply bottlenecks are easing and as supporting its expectation for a full global recovery in 2022.

Australian and US yield curves steepened and one of the biggest changes was a sharp jump in expectations for a rate-rise in the third quarter.

Most market observers now expect the US Federal Reserve to start tightening by 25 basis points in March. 

Morgan Stanley notes the dividend yield spread over bonds fell to 2.17% and the earnings yield gap eased to 3.97%.

The broker adds that Australian investment-grade credit spreads show signs of emerging from multi-year lows.

Brokers Expect Another Year Of Sharemarket Advances

JP Morgan believes omicron sentiment was shoved aside in December but is coming home to roost in January, and should depress March-quarter growth – a short-lived drag.

While global growth is expected to be resilient, the broker’s US economists recently downgrading March-quarter GDP growth forecasts.

JP Morgan notes global supply shortages are still weighing on markets and are improving only slowly, while labour markets continue to tighten faster than expected.

But the analyst believes the stimulus-induced increase in savings should help facilitate a rebound in the June quarter once omicron subsides.

JP Morgan expects further equity market gains for 2022 as supply shocks ease, expecting strong corporate liquidity and strong fundamentals should drive investment, inventory restocking as well as mergers and acquisitions.

The analyst has brought forward expectations of a Fed rate rise to March from September.

Domestically, Morgan Stanley is pinning its hopes on government spending – a major contributor to GDP growth.

The broker notes the federal government has accelerated its infrastructure pipeline and that government spending is forecast to remain high as a share of the economy.

Forward indicators suggest employment growth is forecast to continue recovering. Unemployment is at 4.6% and underemployment has also declined.

In the year ahead, JP Morgan is balancing towards value, cyclicals, and reflation-sensitive sectors and has  expressed “a clear aversion” to bonds and bond proxies.

The analyst is now moving from Overweight the major banks and miners to Overweight Financials (ex-banks), Energy, Industrials and Consumer Discretionary.

The broker predicts a fall in the iron-ore price to US$92 a tonne in 2022 from US$118 at the end of 2021. 

Both the USD and AUD are forecast to rise heading into the Fed rate-rise cycle.

Most analysts expect the yield curve to steepen in the first half before flattening in the second.

The Reserve Bank is on-track to end quantitative easing by June but should lag the US Federal on rate hikes, says JP Morgan, who expects the local 10-year yield to hit 2.4% by mid 2022.

Morgan Stanley says commodities are still positioned to deliver one of the strongest years of returns since the early 2000s. 

While energy stands out as a major outperformer in 2021, Industrial Metals and Agriculture are also forecast to benefit as supply struggles to meet demand.

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