Three years of crises and instabilty…

The last three years have been the toughest I’ve experienced in my 35 years in the financial markets.

We had the worst drought in the state’s history, resulting in the worst ever bushfires inlate 2019 and early 2020. The NSW South Coast was hit the hardest. This was followed by floods on the North Coast a month later. As these natural disasters were unfolding we had the outbreak of COVID19 – the worst pandemic since the Spanish Flu a century earlier.

The Government put us into lockdown in March 2020 – mayhem ensued the announcement. The stock market fell by 40% in just a few days – the falls were steeper than even the darkest days of the GFC.

A combination of zero interest rate policy and a lot of government spending meant there was a lot of cash around and it was looking for a home – the share market had recovered 12 months later and property boomed, helped by the RBA Governor stating that cash rates would not rise until 2024, words that have come back to haunt him.

2021 saw further lockdowns – Victoria never really opened, whilst NSW imposed restrictions from June to September. This was despite the development of vaccines at the end of 2020 which were progressively rolled out in 2021.

The virus underwent various mutations resulting in the Omicron variant which emerged in late 2021. This spread like wildfire; we all remember the queues for mandatory PCR testing! At this point in time, data tells us that over 40% of Australians have had the virus, but the real number is surely far higher.

In February the rain started…and didn’t stop. We had flood after flood – from north of Brisbane to south of Sydney. Lismore had its worst flood on record in February, followed by another in March.

Also in February, Vladimir Putin, in his wisdom, decided it would be a good idea to invade Ukraine. Unfortunately for him, the locals didn’t. What was meant to be a lightning war, with Ukraine capitulating in two days, still rages. The immediate impact was to drive commodity prices higher, especially oil, corn and wheat. This, coupled with supply chain issues, has caused a spike in inflation. If central banks reacted to COVID19 by lowering rates, they are reacting to inflation by raising them.

A perfect storm for market volatility

As inflation emerged last year, market volatility rose. Worst hit have been interest rate sensitive stocks – property and credit funds have been belted. Property will always fall when rates are high. Commercial real estate has also been softer because there is less demand for office space due to the shift to work from home, which may prove to be the panemic’s most lasting societal effect. Retail property has also been softer – COVID created fears that we will never shop instore again – it will all be online. This may be a long term trend but my observation is that shopping centres are booming. It is true, however, that there is a trend towards ordering groceries online, meaning there may be less Coles and Woolworths stores going forward.

The retail sector is down across the board – even Wesfarmers and Woolworths are well off their highs. Online retailers, which boomed during covid, have come back to earth. Kogan peaked at over $25 in October 2020 – it’s now closer to $3. The tech sector came back to earth after the speculative boom of the last two years – good and bad shares were sold.

Building material companies have plunged as a combination of supply chain issues and higher commodity prices have squeezed margins, especially those that have been unable to pass the increases through to their customers – which is pretty much all of them. Even James Hardie, a quality business, is 50% lower than its peak a year ago.

Some sectors have fared better. Generally higher rates will be better for the banks – their margins expand as rates go up. This has been the case for NAB and CBA, but Westpac and ANZ have lagged. Higher costs, however, offset some of the margin expansion.

Health stocks have been resilient. Of the large cap companies, Cochlear, Ramsay and  CSL are lower than their pre-covid levels, but well off their lows. Sonic and Resmed are higher, but off their highs as the COVID boost normalises. Overall, however, health stocks are proving to be resilient.

Resources, dominated by BHP, Fortescue and Rio have held up well. BHP is near record highs. They are almost entirely dependent on the demand for iron ore from China, which is having a few problems of its own. The zero COVID policy has created civil unrest and slowed economic growth. The bigger problem, however, is China’s property market. By July 30, large developers had defaulted on $1 trillion in bonds. Whilst Beijing has recently taken steps to support the market, property prices have fallen for the last 12 months. On the plus side, the government has set aside 7.2 trillion yuan for infrastructure projects.

Woodside’s fortunes turned when Russia invaded Ukraine – suddenly fossil fuels became a necessary evil which were not going to be assigned to the dustbin of history – at least not for another decade or so.

So where to from here?

Whilst 2020 to 2022 have been three years of uncertainty, I think 2023 will be a bit more predictable. Inflation will peak, if it has not done so already, rate rises will also peak – the heavy lifting has been done – unemployment will rise and the economy will inevitably slow. I don’t expect the share market to boom, but sectors that have fallen the most will start to look like value. There will be periods of weakness and value should start to emerge.

The Collins Dictionary has just announed its 2022 word of the year: “Permacrisis”. The word is defined as “an extended period of instability and insecurity”. Collins said it chose the word as it “sums up quite succinctly how truly awful 2022 has been for so many people”.

None of us knows what 2023 has in store. Still, we can live in hope! 

On behalf of the McEwen Team, I wish you a very happy, safe and healthy Christmas, and a wonderful (preferably crisis free) New Year.

Rob McEwen
Principal, McEwen Investment Services

General disclaimer

This content is intended only to provide a summary and general overview of the subject matter covered. It is not intended to be comprehensive nor does it constitute advice. We attempt to ensure that the content is accurate and current but we do not warrant the content nor its currency. You should seek professional advice before acting or relying on any of the content.

How can we help?
If you'd like to discuss any aspect of your estate plans, please call us on 1300 623 936 to arrange a time to meet and we can discuss your particular requirements in more detail.

7 + 12 =