Throughout the year, Wall Street has provided strong returns, above 20 per cent. It was a solid year for equities in Europe. The S&P/ASX200 has been a bit more subdued, up about ten per cent. But if you add in dividends, you’re up about 15 per cent on a grossed up for franking credits basis.

 

It wasn’t such a good year for bonds though. Bond yields have increased, and that’s triggered capital losses for bonds.

 

Looking forward, 2022 will probably be the year when COVID-19 goes from being a pandemic to being endemic, or something we’ve learned to live with. It will be something akin to the common cold or flu, but there will be setbacks along the way.

 

 

In Australia we are going to see good growth, particularly following the setbacks that have depressed this year relative to expectations.

 

The current spike in inflation is a major issue and we will see ongoing pressure on central banks. We believe the Reserve Bank of Australia (RBA) will start raising rates late next year. In any case we’re still going to continue to have very low interest rates next year.

 

In share markets, the broad trend is likely to remain positive, but we are coming into a tougher phase of the bull market. There’s going to be more volatility and more constrained returns.

 

COVID-19 is still high on the watch list for the share market. Inflation, supply constraints, China and elections in Australia, France and the United States are also on that list.

 

On the local election, the difference between the two major parties now is nowhere near as great as it was back in 2019 so it’s unlikely there’ll be as much riding on the result in 2022, as there was last time around.

 

Global shares are expected to return high single digits in 2022, but expect to see the long-awaited rotation away from growth & technology heavy US shares to more cyclical markets in Europe, Japan & emerging countries. Inflation, the start of Fed rate hikes, the US mid-term elections & China/Russia/Iran tensions are likely to result in a more volatile ride than 2021. Mid-term election years normally see below average returns in US shares and since 1950, have seen an average top-to-bottom drawdown of 17%, usually followed by a stronger rebound.

 

Australian shares are likely to outperform (at last) this year helped by stronger economic growth than in other developed countries, leverage to the global cyclical recovery and as investors continue to search for yield in the face of near-zero deposit rates but a grossed-up dividend yield of around 5%. 

 

Australian home price gains are likely to slow, with prices falling later in the year as poor affordability, rising fixed rates, higher interest rate serviceability buffers, reduced home buyer incentives and rising listings impact.

 

Cash and bank deposits are likely to provide very poor returns, given the ultra-low cash rate of just 0.1%.