Investment market review - Quarter-ended 31 December 2021

The Research Team provides a performance summary and commentary on each of the five main asset classes.

Australian shares

The Australian market rose 1.53% in the December quarter. The leading sectors were Materials (up 12.44%) and Utilities (up 10.02%). Energy was the worst performer (down 8.82%). In the materials sector, BHP had a significant rebound after a relatively poor Q3 – this was a key driver for the sector.

At a style level, Value was the worst performing style for the quarter, being the only style to produce a negative return, albeit a relatively small negative. Having said this, Value performed broadly in line with the Index for the year.

Overall, Quality and Growth continued to power ahead, both being the best two performers for the quarter and the calendar year.

Australian micro-cap equities performed very well over the quarter.

Listed property trusts

The Australian Real Estate Investment Trust (A-REIT) sector had an exception quarter, returning 10.1%. Note the sector is very concentrated with only 32 securities in the Index as at 31 December 2021 and the top 10 securities make up 78.5% of this index.

The sector was driven higher by Goodman Group, the largest security in the Index. After Goodman’s performance tapered off at the end of Q3, it performed exceptional well over Q4 rising 22.2% for the quarter. Scentre Group, while up about 5.7% for the quarter, actually underperformed the Index. As for other large securities in the sector, Stockland was down 5.4% with Dexus up about 3%.

International shares

Interestingly, Q4 2021, saw developed market shares post strong returns despite the emergence of the Omicron variant and the prospect of tighter central bank policy. For the quarter, International shares rose 7.1%.

From a style perspective, all styles produced positive returns for the December quarter, with Quality being the standout. For the calendar year, all styles produced very favourable returns, with Momentum being one of the poorer styles, but still retuning an impressive 21.2%.

In the U.S., Tech as a sub-sector was one of the strongest performers over the quarter, with chipmakers especially strong. Real estate also performed well, as investors expect e-commerce to continue to grow and drive further demand for industrial warehousing.

In Europe, Utilities were among the top performers, with Technology hardware and semiconductor stocks performing particularly well. The luxury goods sector also performed very strongly, recovering from the summer sell-off. Meanwhile, the communication services and real estate sectors saw negative returns.

Fixed interest

The Australian bond market benchmark, as measured by the Bloomberg AusBond Composite Index, fell 1.5% during the December quarter.

Australian yields rose significantly during the quarter, with the three-year bond yield increasing by a very large 0.60%. The long end of the curve rose 18 bps, which again was a significant move. This led to a poor quarter for Australian Government bonds in general.

The size of the increase in the 3-year bond yield relative to the size of the changes in the cash and 10-year bond rates indicates that rate rises are expected, but not immediately.

As more commentors around the world are suggesting that some inflationary pressures are less transitory than initially thought, bond yields will likely continue to trend higher.

Cash

The Cash benchmark, the Bloomberg AusBond Bank Bill Index, was flat during the December quarter.

Core Trimmed Mean inflation rose 1.0% quarter-on-quarter and 2.6% year-on-year, well above consensus expectations of a 0.7/2.3% rise. Importantly, this is well above the 0.6/2.25% the RBA was forecasting back in November. This means the RBA will need to revise up their inflation track to show underlying inflation at or above the top of their band by mid-year. This means the RBA’s upside scenario for the economy is probably now consistent with a rate hike in late 2022, while their central scenario is now likely to sit in early 2023 based on the RBA’s likely wages outlook. This will likely mean interest rate rises earlier than initial expected.

Asset class returns