2021 In Review

Now that we have settled into the new year, we think it’s always important to look back at the previous year to see what went well, what didn’t, and what we can look forward to for 2022.

What happened?

2021 brought together an almost perfect combination for markets and economies alike, which culminated in some of the strongest economic growth figures we’ve ever seen, and incredibly strong returns for growth assets (although very poor for defensive assets) following a tumultuous 2020.

Its fair to say the recovery we saw in 2021 came through a lot stronger than most people had anticipated, even covid outcomes doing little to counter the positive economic backdrop, well supported by extraordinary levels of stimulus, and very strong investor sentiment. Investor confidence and sentiment on the growth asset front (ie. Equities, property, infrastructure) saw strong returns despite rampant US inflation, but it did take its toll on the returns of bonds and the real returns (ie. Net of inflation) on cash.


On an Australian dollar basis, returns for key asset classes in calendar year 2021 were as follows:

Cash – 0.03% – a function of the near zero emergency level RBA cash rate and made worse by local inflation finally landing with the RBS’a 2-3% target band as the year rounded out.

Australian bonds- (-2.8%) – a function of rising bond yields (thus falling prices) as concerns arose regarding when the RBA was likely to reverse course on the extraordinary stimulus being provided. The RBA did abandon their “….no rate rise before 2024 at the earliest…” rhetoric whilst foreign bond investors departed the local market as the Australian dollar weakened. 

Global Bonds Hedged – (-1.53%) – a function of rising bond yields (thus falling prices) as concerns arose regarding inflation remaining stubbornly high, thus putting pressure on central banks to reverse course on the extraordinary stimulus being provided. Some countries increased rates in 2021, particularly developing countries, whilst the US and the UK saw some of their highest inflation numbers in decades. Supply of bonds also didn’t help with governments continuing to shake the money tree to pay for their stimulus. A falling Australian dollar hurt hedged returns. 

Australian Listed Property – 26.14% – a function of improving sentiment regarding where office and retail sectors might have landed in a post-covid world (ie. nowhere near as bad as expected in 2020), along with industrial assets continuing to power ahead. Book values lifted as did distributions, whilst the asset class undoubtedly benefited from investor inflationary concerns and the hunt for yield. 

Global Listed Property unhedged – 40.74% – much the same dynamics as for Australian listed property above. A falling Australian dollar also helped boost unhedged returns.

Global Listed Infrastructure unhedged – 22.80% – a function of a recovery in sentiment towards user-pays assets like airports and toll roads which were hard hit in 2020 and supported by strong and still improving fundamentals in regulated assets. The asset class undoubtedly benefited from investor inflationary concerns and the hunt for yield, along with the insatiable appetite for infrastructure assets from pension funds and private vehicles. A falling Australian dollar also helped boost unhedged returns.

Australian Equities – 17.23% – a function of strong earnings and rising dividend yields supporting both absolute and relative valuations. Returns from the financials and industrials sectors were strongest, whilst falling commodity prices and concerns regarding the Chinese economic outlook saw the resources sector lag. Small company returns came in slightly below large company returns. 

Global Equities unhedged – 25.81% (29.29% for developed countries only) – a function of strong and improving earnings and very low returns on defensive assets supporting both absolute and relative valuations. Strongest returns came from the US, with the broader equity market outperforming US tech as the prospect of sooner than expected Fed rate rises hurt some high-flying technology stocks. The UK and Europe also experienced strong returns, with significantly more relative value on offer here, whilst Asian and Emerging markets were the laggards as weakening Chinese economic growth, concerns regarding the impacts of covid, and rising central bank cash rates in some countries to curb inflation impacted these markets. A falling Australian dollar also helped boost unhedged returns. 

Contrast to 2020

Many of these returns were in stark contrast to those seen in the 2020 calendar year, where bonds had a strong run (risk-off appetite), listed property and infrastructure were punished (covid policy affected), with anemic returns from Australian equities, whilst global equities produced reasonable returns boosted by incredibly strong US tech sector returns. 

The strong returns we witnessed in 2021 were a function of:

  1. Improving investor confidence and sentiment
  2. Strong company fundamentals – balance sheet strength and earnings
  3. Significant amounts of stimulus provided by both governments (fiscal) and central banks (monetary)

Interestingly, 2021 may have been an even stronger year for returns if it weren’t for the 3 main risks getting everyone’s attention – ie. restrictive covid policy responses causing labour and goods shortages, rising inflation and central bank rhetoric/action, and weakening Chinese economic growth / policy pivot – all of which will carry over in 2022 as the key risks likely to impact market returns and broader economic conditions. 


The election cycle was quiet in 2021, but we did see quite a few geopolitical risks including Russia / Ukraine, US / Iran, US / China, Australia / China, and China / Taiwan. Whilst each of these had little impact on investor sentiment, given the very strong market and economic backdrop, none of these risks have gone away and could present some problems in 2022.


Other areas of interest in 2021 included: a significant rise in oil and gas prices with oil rising almost US$30 throughout the year, whilst gas prices doubled, as demand surged on economic reopening and supply concerns; and the Australian dollar fell against the US dollar, falling more than 8 cents from peak to trough, as China/commodity concerns and east coast lockdowns impacted the Australian dollar whilst the US dollar saw strong upward pressure as the US central bank readied investors for earlier than expected, and potentially faster than expected, rate rises in order to curb inflation. 


Overall, our backdrop is positive in that:

1. plenty of stimulus is still in the system 

2. a high household savings rate remains, further supported by rising wealth

3. corporate balance sheets are in good shape

4. broad re-opening should see a swift pick-up in the services part of the economy (and subsequently less goods demanded)

5. rates of return on defensive assets are still too low, which could further support growth asset flows

These are supportive of a reasonable year for asset prices, but with significantly lower return outcomes likely in 2022 versus 2021. 


There are some risks that remain which still need to be sorted through in 2022. These include:

1. Covid policy – ie. lockdowns, restrictions on movement / labour / goods, consumption patterns, business investment intentions, etc. – we think we’re closest to a “way out” or resolution here given omicron characteristics and reasonably good acceptance thus far that it can’t be stopped (ie. very transmissible, likely less deadly) along with government’s not wanting to stretch the social contract any further considering their upcoming election cycles.

2. Inflation – more so the central bank reaction function to inflation – ie. who blinks first. We believe significantly high inflation like the US is experiencing (and some developing countries) is a function of covid restrictions (supply) and over generous fiscal response (demand). Most would agree with that. Where we have healthy disagreement in markets is where inflation settles and how quick it takes to settle. Consensus is it settles higher than pre-covid but not at current levels – eg. headline US inflation of 3-4% likely in 2022 (vs 5-6% now and 1-2% pre-covid). But it’s guesswork right now as to how quick it settles and where it settles – ie. there’s no way of being certain here and anyone who says otherwise is lying. 

A contrasting perspective – there’s a chance inflation could settle very quickly and near pre-covid levels if all restrictions are removed, government fiscal efforts cease, central bank rates rise too quickly, and Chinese economic growth runs lower for longer.  This would mean a return to pre-covid economic conditions and hence central bank settings. We firmly believe that the terminal cash rate in this cycle for how far central banks can lift rates is significantly lower than it has been in the past due to the significant amount of debt added to the system over the last 2 years. So, rates will be higher over the course of the next 2 years than they are now, but there’s a ceiling as to how far they can go before being destructive (eg. Australian housing market). 

The market remains unsettled on the inflation front so there’s no clarity on the path out of this risk right now which is causing gyrations in markets. 

3. Chinese economy – the government is clearly playing the long game with regards to pivoting the economy (ie. more consumption, addressing quality of life issues like cost of living and birth rates, research and development, tech, healthcare, etc.) but that transition won’t be easy given the shape of their economy over the last 20 or so years and what they’ve (and we’ve) become accustomed to over that period. It could get messy. It could work out spectacularly well, or they could abandon their plans and resort to the way they’ve run the economy over the last 20 years. Either way, global economies and markets will be affected in some way, shape, or form. There’s no clear way out of this one as yet. 

4th and 5th risks include geopolitical and domestic election cycles. These risks always exist, but they’re a little more unique this time around given the post-pandemic period we find ourselves in and how extensively fiscal and monetary policy were utilised over the last 2 years.


Asset price returns and volatility in 2022 will be largely dependent on how and when these risks are resolved. As such, we expect a bumpier ride for markets in 2022, with asset selection likely to be key. Corporates and households appear in good shape, but how long they remain in good shape will largely depend on how quickly governments and central banks exit their emergency policy paths. As the saying goes, it’s only when the tide goes out that you learn who has been swimming naked. 

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