In this guide
If 2021 taught us anything, it was to expect the unexpected and be flexible when your best laid plans fall in a heap.
At the start of the year, the economy was on the mend, vaccines were on the way and hopes were high that life would soon return to normal. But waves of new COVID-19 variants – first Delta then Omicron – scuttled that. Instead, we faced on-again off-again lockdowns, border closures and business disruption.
And yet, while our personal and working lives faced unforeseen disruption, our super and investments generally have surprised on the upside.
According to Chant West, the median growth super fund (which typically holds 61–80% in shares and other growth assets) is on track to return around 12% in calendar 2021. This follows a 3% return in 2020. Indeed, all risk categories from conservative to high growth posted positive returns last year.
As the table of financial market returns for the past two calendar years shows, at a time of historically low interest rates, shares and residential property have done the heavy lifting with US shares hitting record highs. The table also demonstrates the importance of diversification and staying the course, as some of last year’s top performers were laggards the year before.
Calendar year returns to 31 December (% change)
| 2021 | 2020 | |
|---|---|---|
| Shares | ||
| MSCI World Index (excl. Australia) | +20.5% | +14.0% |
| S&P 500 | +27.0% | +16.4% |
| ASX 200 | +13.0% | -1.5% |
| Interest rates/bond yields | ||
| Cash rate | 0.1% | 0.1% |
| Australian 10-year bond yield | +0.7% | -0.4% |
| US 10-year bond yield | +0.6% | -1.0% |
| Currency | ||
| $A vs $US | -5.8% | +9.9% |
| Commodities | ||
| Iron ore | -25.3% | +70.3% |
| Oil (Brent Crude) | +53.0% | -20.5% |
| Gold | -3.5% | +24.7% |
| Australian residential property | ||
| CoreLogic Home Value Index | +22.1% | +3.0% |
The big picture
Despite the challenges of dealing with a global pandemic, the Australian economy picked up steam in 2021. After shrinking 2.2% in 2020, economic growth was up 3.9% in the year to September and is on track for annual growth of 4.4%.
The world’s two economic powerhouses – the US and China – are doing even better. In the year to September, both grew at an annual rate of 4.9%.
While forecasting is even more of a mug’s game than usual these days, economists expect Australia’s economic growth will shift up a notch to around 5% in 2022. This is good news for jobseekers, with unemployment falling to 4.6% ahead of the Christmas rush while wages growth edged up 2.2% due to skill shortages.
But challenges remain. As global demand for goods and services picks up, ongoing lockdowns and border closures have disrupted global manufacturing and supply chains. The result is higher prices and inflation, which jumped to 3% in the September quarter after stagnating at an annual rate of 0.9% in 2020.
Inflation and interest rates
Australia’s official cash rate spent another year at the historic low of 0.1% and the Reserve Bank insists it will not lift rates until 2023 at the earliest.
While there is no doubt the next move in rates will be up, the Reserve Bank says it won’t move until inflation is “sustainably” between 2% and 3%, unemployment is closer to 4% and wages growth near 3%. Many economists believe it will hit these targets sooner and begin lifting rates later this year.
To add a global perspective, the inflation genie is already out of the bottle in the US where it stands at 6.8%. In the UK and Germany, it’s over 5%. While this is weighing heavily on financial markets, many commentators believe higher inflation will be transitory due to short-term supply chain blockages.
