ASX Market Update 23rd December 2021 + Christmas Wishes

ASX200 (XJO)

· At this stage we have seen a small ‘Santa Rally’ for December with the XJO +1.93% for the month.

· September, October & November saw the XJO fall for three consecutive months after 11 straight months of gains.

· Returns, including dividends, for 2021 sit at approx. +16.7% for the XJO at this stage.

· The three best sectors for 2021 are Telecoms +25%, REITS +21% & Financials +19%

· The worst sectors of 2021 are Technology -6% & Energy -2%

Global Market Commentary

S&P500 Index

The markets and the global economy have entered a new era of the pandemic recovery. If 2021 was the year with ‘strong tailwinds’, where the Fed always had our backs, then 2022 will be the year we fly into ‘brisk headwinds’ as the Fed tapers its QE support and is focused on more on keeping inflation under control.

At its last meeting the Fed, and Powell, did a big 180, acknowledging that inflation pressures may not be all that transitory and then also quickening the pace of its QE tapering measures. The markets seemed to shrug this off as long-term yields remained subdued around 1.40% and all the focus was on the new ‘omicron’ covid variant. The market likes to sell off and ask questions later and I think this was what it did on the new covid news. On the surface the new variant seems to be much milder, but as always, its early days and more data is needed.

However, I believe the sell off, and continued selling, were a result of some deeper underlying concerns in the market and the covid news was simply a mask. High valuations, peak earnings growth, high inflation, stimulus roll off, high stock concentration, potentially higher yields, high growth expectations etc. are just some of the concerns we can see in the market. Whilst none are enough to cause a major crash, a correction of 10-20% could be in order to end 2021 and enter 2022. These are short term problems, mainly centered on the US markets, that I feel present opportunities rather than persistent problems. As I heard Liz Young from SoFi on a podcast recently say ‘the market will bottom long before the bad news peaks’ and I feel that sums up the situation pretty succinctly. If things do go really pear shaped, then we need to keep this in mind. In my opinion the biggest threat to markets is when earnings growth expectations overshoot and earnings/forecasts miss on a larger scale. That’s when markets tend to peel back. In the last 18 months we have lived in an environment where growth expectations have been set so low it’s been hard to not beat them. Those expectations have been rising and I believe are at risk of overshooting in the short term in either Q4 21 or Q1 22 earnings.

Furthermore, there is a chance we may have already seen a correction under the surface. The top 5 (Apple, Microsoft, Alphabet, Meta & Amazon) stocks in the Nasdaq make up 50% of the top 100 & 25% of the S&P500. For 2021 the Nasdaq is currently up 24%, but if you remove the top 5 stocks then its down 20%+. Most stocks outside of these big 5 have had a very rough year and may have already had the correction we needed (to semi quote Paul Keating). Thus, if these larger stocks do themselves correct, or trade sideways, in 2022 then a better performance from the rest could in fact still lift the index and claw back some of that concentration.

Having said all this the S&P500 sits less than 1% off all-time highs and has formed higher lows in a healthy technical formation. We may be just jumping at shadows here and really its just a flow of money from high growth stocks, such as the tech, into more traditional value plays. The current generation of investors seem to get a bit shaky as soon as we come off a few percent. Guess they weren’t the ‘HODLers’ they thought they were with those diamond hands.

That’s enough about US & global markets. You are mostly here to hear about the Australian movements.

Australia

S&P/ASX 200

Whilst the XJO has been caught up in the recent sell off, and has rebounded somewhat, we are still approx. 3% off our all-time highs. Now this is mainly due to our high exposure to resources and the subsequent sell off in iron ore related stocks we have had since late August. I believe this will turn in our favour in 2022 but I’ll get to that later.

Again, like in the US the RBA has been supporting our markets with QE measures that look set to end in February next year. The difference with the RBA though is it has remained relatively doveish compared to the Fed standing by its mandate that it will not lift rates until we see full employment and a consistent inflation read of 2-3%. They have said they don’t believe this will happen until 2024, but I also believe this is just them jawboning the markets to instill further confidence. They are very well aware rates will rise before 2024 and could happen as soon as 2H 2022. This will provide some headwinds to us in 22 when the RBA does finally turn Hawkish, which I believe will happen at its first meeting in February. We also will have an election in Q2 in 22 which generally puts a handbrake on our markets, but I also believe that to be short term as both are parties are similar in policy. Thus, unless we have a hung parliament, like we did in 2016, its just another opportunity.

Once we get past those two speeds humps, I believe it will be a very positive year for the XJO. The economy should rebound strongly in the later half of the current quarter and in 2H FY22. Earnings should jump sharply again as the economy opens and people are able to consume as normal again. Firms are hiring, Jobs Ads are at 13-year highs, skilled-job vacancies are at record highs, this all points to a very healthy economy.

Its my belief the XJO outperforms the US markets overall in 2022. Whilst the US has mostly opened, and consumers have been free to do as they please the Australian economy has seen a large part of it shut down for over a quarter and are only just opening now. This means our earnings are skewed more favorably than the US as we have seen that bounce there and it’s been mostly factored in. I also believe due to a more accommodative China we see a big rebound in resource stocks which make up 20-30% of our market.

The XJO has been range bound since late October trading between 7180 to 7470. Any break either way will see significant moves with a move back to our previous highs on the upside and a target of 6917 on the downside. From a technical perspective we have bounced off the 200dma twice in a healthy manner adding to the sentiment we see a bullish move from here. Its my belief we will see an index level of 8000+ in 2022 on the XJO.

If we zoom out and look at the weekly chart since our major correction last march you can see the market is using that previous high of around 7139 as current support. The range bound consolidation we are seeing in the XJO now is very healthy for a longer term move to the upside in my opinion.

Themes for 2022

I thought to round out the last newsletter for the year I would talk about what I see as some of the themes for 2022. These aren’t necessarily things to be wary of but more headlines that will dominate the year ahead.

Inflation/Higher Yields

Perhaps an easy one to start off with but I believe we are going to see much higher yields in 2022 with US 10 years crossing 2% along with Australian yields as well. Three rate hikes in the US are being priced in with one locally. Inflation will be sustainable, not at the current near on 5% core levels in the US, but around 3-3.5%, which when compared to the last 20 years is very high. Australia will see its trimmed mean inflation figures push past 3% as well. This is obviously a threat to markets and will create periods of volatility and buying opportunities.

Accommodative China

Its already starting to happen but China’s focus will move from tightening and tougher regulations to fiscal support and easing in 2022. They have already cut their RRR a couple of times this quarter, have seen a large increase of local bonds issued and a directive from the Government to push credit to certain sectors. This will obviously translate to an increase in infrastructure spending and higher demand for resources. Also, once the China Winter Olympics are finished with, I believe steel mills will be allowed to produce at capacity once again. This is a net positive for markets and in particular Australia as China demands more of our resources once again and put upward pressure on prices. The chart below by Morgan Stanley shows the influence and the percentage of demand the property sector has on certain commodities.

Crypto Bubble Bust?

This threat hangs over our heads for the foreseeable future. It may happen in 2022, it may be later down the track, but I strongly believe that a Crypto bubble bursting is in our near-term future. It will have large ramifications for financial markets as the asset is becoming more mainstream. Whether you agree with it or not its here to stay and its only getting more popular. The US allowed its first Bitcoin futures ETF to list this year and the ASX will have four of its own in Q1 22 (Bitcoin & Ethereum). Its also being used by many fund managers to help diversify portfolios and it already has a large uptake by retail. The more mainstream it gets the more leverage that goes into the system. With an asset class that is so volatile this presents a huge risk of a credit induced crash within it. These ripples will be felt across the whole financial system.

XJO Outperformance

I mentioned this earlier but believe due to the XJO’s bias towards resources and value themed investing I feel it will outperform the S&P500 in 2022. It doesn’t happen much but if rates are to rise and resources come back in vogue then this favors the Australian market. Again, I believe the 8000-index level will be surpassed and with dividends we look in for a great year. We may lag in the first half of the year with an election & more hawkish RBA but expect our strong earnings to drive our markets. US markets will be held back by already high valuations and expectations + a large concentration in tech.

Ethical Investing

Whilst ethical or ESG investing has already become huge in 2021 it will take another leg up in 2022. Not only that but there will be more a focus on the filters involved in this type of investing and if it is truly ethical. There is already an investigation going on in the US into some of these funds that look to be a mirror of image of existing funds but with an ethical label slapped on them and higher fees charged. It seems to be a form of ‘greenwashing’ investment products that could come back to bite the fund managers. If more stringent regulations are placed on the area, then we could see funds forced to unwind positions or ultimately close. Given how large this area is becoming it could have large ramifications on markets.

Value over Growth

With rates and yields expected to rise this favors the value end of the market. Sectors such as financials, energy, utilities, telecoms, industrials, staples & resources should all outperform sectors such tech, discretionary retail, gold, health care & real estate. This also plays into the XJO outperformance theme above.

Dr. Copper

I expect copper the metal and underlying copper themed stocks to outperform in 2022. With China set to ease regulations and promote fiscal stimulus their copper imports should start lifting again. Add in global demand due to the decarbonization of the globe and increased spend on infrastructure it will bode well for the red metal. Supply continues to be constrained with no new major mines due to come online any time soon. To add to the supply side woes the far-left candidate Boric looks to have won the Chile election this week. Some of his policy included substantially increasing taxes on miners in the country, which will make it far less attractive for companies to operate there. It is important as 28% of the world’s copper comes from Chile. Other minerals I expect to do well in 2022 include lithium, tin, nickel, and iron ore. However, it will probably be a rising tide lifts all boats situation whereby most metals do well.

Gold has lost its Shine

Again, linked to rising rates and yields I expect further underperformance of gold in 2022. We may see one more run from it as real yields remain weak in Q1 but that should turn around in April when comparisons in the data make it likely to see real yields climb again. I wouldn’t be surprised to see a price of $US1680 or lower in 2022 from the current $1800oz. We may also be seeing some money shifting away from gold into crypto making it hard for it to sustain its price.

I will wrap things up here as I am sure you want to get into your Christmas festivities. The kids are becoming very excited as its only two sleeps away until Father Christmas arrives. It’s great when you have younger children who are really into and believe in the magic. It seems to lift the whole spirit of the season as you can relive that magic from your childhood all over again. Plus, the joy and smiles on their faces you can’t put a price on. Our youngest also celebrated his fourth birthday on Tuesday. He will start Kindy next year and our eldest will start school. This both excites me to see them continue to grow and develop into the people they are but also terrifies me as they get older and slowly rely on us less and are more exposed to the outside world. I just want them to stay our little men forever!

Overall, it’s been a solid year for the XJO with many challenges along the way. I can’t begin to thank you all enough for the support you have showed me in 2021, and for many of you a lot longer. Not only does it support me and my business, but also my family. Because of you all I have been able to work from home throughout the entirety of my kids lives and been able to be there to see them grow up. This is priceless and something many parents miss out on. I will forever be grateful for this.

In closing I would like to wish you and your families a Wonderful Christmas and a happy and safe new year. At this stage it looks like the worst is behind us and 2022 could truly be a magnificent year. I look forward to chatting with you all in the new year. Go Crows!

P.S. Please note the ASX operating hours below. I will be available throughout the entire festive period as per usual.

Friday 24th December- Early Close 2:10pm est

Monday 27th December- Closed

Tuesday 28th December- Closed

Wed 29th & Thurs 30th December- Open

Friday 31st December- Early Close 2:10pm est

Monday 3rd January- Closed

heath@hlminvestments.com.au

0413 799 315

Important Notice

Any advice in this article should be considered General Advice only and does not consider your personal needs and objectives or your financial circumstances. You should therefore consider these matters yourself before deciding whether the advice is appropriate to you and whether you should act upon it. I am happy to assist you in this process. To do so, I will need to collect personal and financial details from you before providing my recommendations. Please note the author may own shares in the companies mentioned in the above blog.