2021-22 (CY22) Calendar Year was a year to forget. After a bull market that lasted for more than a decade
since the GFC of 2008-09, markets around the world experienced a massive pullback. Both conservative investors with a concentration to high-quality bonds or high-risk investors with an allocation to technology stocks, incurred losses. In fact, 2022 was just one of five in the last 100 years where both US Treasuries and the S&P 500 finished in the red.

What largely drove the bull market between 2009 and 2021 were a few separate but related themes; outburst of revenue growth in high-flying sectors such as information technology and communications services, low inflation, and a very prolonged period of low-interest rates, coming out of the GFC. Persistently low-interest rates not only resulted in a low cost of capital for companies in growth mode but also caused investors to give very high multiples to companies who delivered high sales growth rates. In many cases, these companies were and are far from profitability.

2022 marked a dramatic change in investor psychology. For years, but particularly since the start of the COVID pandemic, the old standby valuation metric of price/earnings was ignored in favour of the clouded price/sales metric. Late in 2021 and more so in 2022, this growth mindset, at last, fell out of favour, quickly collapsing some of the high vaulting valuations in pandemic-darling stocks like Meta, Alphabet, Netflix, and Tesla.

In response to soaring inflation in 2022 founded on Covid-induced supply-chain issues, firm demand in major economies and the fallout from the war in Ukraine, central banks across the world scrambled to lift interest rates from emergency lows to levels that are generally regarded as necessary to reduce the rate of inflation. When interest rates begin to rise, long-duration assets experience the most dramatic falls in prices. This is precisely what we experienced in 2002. Duration is the financial term that measures the sensitivity of an asset’s price to a change in interest rates. In low or falling interest
rate environments, investors want to own assets with long duration, as they tend to rise in price the most as interest rates fall e.g., long-term bonds or the ultimate long-duration growth asset: growth stocks. Conversely, when interest rates do begin to rise aggressively, as in 2022, long-duration assets experience striking falls in value. For example, most bonds pay a fixed coupon (i.e. interest payment) and when rates go up, the only way a fixed coupon can equate to a higher interest rate is if the investor pays less for the bond.

But it is not all doom and gloom, the Australian economy outperformed in 2022. The year ended with trade accounts solidly in surplus, the federal budget broadly balanced; jobless rate at 50-year lows. And while the inflation rate lifted over the year along with wages, other countries are experiencing far hiker spikes in prices.

From a COVID-influenced low base, the Australian economy grew by 5.9% over the year to September, but it is likely to slow over 2023 in response to higher interest rates.

Starting in May, the Reserve Bank (RBA) lifted the cash rate from 0.1% to 3.1%, the most aggressive monetary tightening ever imposed. The Consumer Price Index lifted 7.3% over the year to September 2022.

The past three years have proven to be challenging and no let-up in the short term is expected for Australian investors. Inflation, together with uncertainty about where interest rates will settle is expected to dominate in 2023. High energy prices will persist, the war in Ukraine still rages and the re-opening of the Chinese economy poses risks and opportunities.

It is expected that the average balanced growth superannuation fund (41% – 60% Growth Assets) would have returned -6% pa for the 12 months to 31 December 2022. This followed a positive return of around 9% in the 2021 year. Balanced growth super funds returns have averaged around 3.5% pa over the last five years, above inflation, and bank deposit returns.