Given the sell-off in bond yields so far this year, rising inflationary expectations, and the collapse of the Evergrande Group in China, it is unsurprising many global share market indices took a breather and recorded a relatively lacklustre December 2021 half-year in terms of performance.
Of the major markets the Hong Kong Hang Seng Index was down 18.8 per cent, however the US S&P 500 Index was up by 10.9 per cent whilst the Indian Sensex Index was up by 10.3 per cent.
Evergrande Group’s failure could see some social instability in China, and a severe haircut for bondholders and the upcoming restructuring seems likely. That said, many markets have still delivered another superb year of capital growth over calendar 2021, and this does not include the dividend yield on these markets. France’s CAC 40 was up 28.9 per cent, the US S&P 500 and Nasdaq Index increased by 26.9 per cent and 21.4 per cent, respectively, whilst the Indian Sensex Index rose by 22.0 per cent.
Analysis by Elroy Dimson, Paul Marsh and Mike Staunton from the London Business School reveals most major share markets have returned around 10 per cent per annum on average, inclusive of dividends, for the past 120 years.
Investors have been keeping a keen eye on bond yields. Rising inflationary expectations can be seen in many parts of the global economy. And there are many companies reporting production, distribution and logistical bottlenecks. The question which will influence asset valuations is whether these inflationary expectations are transitory, or not.
Over calendar 2021, Australian ten-year bonds at 1.68 per cent, US ten-year bonds at 1.51 per cent, UK ten year bonds at 0.97 per cent rose by 0.71 per cent, 0.59 per cent and 0.78 per cent, respectively. Nevertheless, by historic standards these bond yields are exceptionally low, especially when we consider the US headline inflation rate at 6.8 per cent to November 2021, is the highest rate of growth since June 1982 (when US 10-year bonds were yielding 13.5 per cent). All eyes will be on the “Powell Pivot” as the US Federal Reserve is expected to end its quantitative easing program by March 2022. That said, many Central Banks will attempt to keep a lid on the “price of money” and certainly below the rate of inflation as a solid increase in bond yields would likely prove a frightening prospect for most asset classes.
The biggest news on the commodity front was the crash in iron-ore over the December 2021 half year, from US$214/tonne to US$115/tonne. Again by historic standards, and using the cash cost of production as a yardstick, anything around US$100/tonne is still an excellent price for all the large scale producers. Both Copper (up 27 per cent to US$4.46/lb.) and Wheat (up 20 per cent to US$7.71/bushel) did well, and those commodities exposed to the global vehicle electrification tailwind – especially lithium – enjoyed an extraordinary year.
The Australian Dollar declined from US$0.77 to US$0.73, however against the British Pound and the Euro, exchange rate fluctuations have been relatively limited. One highlight has been the Australian Farm Sector which should record profits in 2021 and the price being paid for rural land, like many other asset classes, has been extraordinary. Our country friends are enjoying fabulous prices for both livestock and grains, in addition to relatively kind weather conditions, although in some cases “La Nina” has actually seen too much rain.
|31-Dec||30-Jun||31-Dec||6 months to||12 months to|
|% Change||% Change|
|US 10 Year Bonds||0.92%||1.47%||1.51%||0.04%||0.59%|
|German 10 Year Bunds||-0.57%||-0.21%||-0.18%||0.03%||0.39%|
|UK 10 Year Gilts||0.19%||0.72%||0.97%||0.25%||0.78%|
|Japan 10 Year Bonds||0.02%||0.06%||0.06%||0.00%||0.04%|
|Australian 10 Year Bonds||0.97%||1.50%||1.68%||0.18%||0.71%|
|Australian 11am Call||0.10%||0.10%||0.10%||0.00%||0.00%|