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Strong returns as economies continue to rebuild

December 2021

The global economic recovery has continued into the second half of 2021, supported by central bank stimulus measures and strong vaccination progress which has enabled economies to ‘re-open’ without overwhelming hospital systems. This has supported earnings and boosted share market returns.

That said, the speed of the pandemic recovery has slowed more recently with the global economy facing into soaring energy prices, rising costs for goods following a spike in demand and China restructuring towards the consumer, slowing growth.

For more information, please read the economic and market update below.

OneAnswer Performance

Strong returns over the year for growth assets*

Returns over one, three and five years to 30 September 2021 have all been positive in the suite of diversified funds, which are available through OneAnswer.

Over the one-year period, the continuation of the pandemic recovery is reflected in strong performance ranging from 5.91% for the Conservative Index to 22.89% for the High Growth Index.

Similarly, three and five-year performance is also strong for these index funds. Over the five-year period, the performance ranged from 4.36% for the Conservative Index to 9.91% for the High Growth Index. The Growth and High Growth Index funds have a higher allocation to growth assets, such as shares, which have benefitted from the share market rally over the past decade and the strong rebound from the pandemic-driven recession of early 2020.

To view your investment mix and check on the latest performance of your portfolio, log into your account or register for access on My OnePath

Integra Performance

Strong returns over the year for growth assets*

Returns over one, three and five years to 30 September 2021 have all been positive in the index funds, which are available through Integra Super.  

The Australian Shares Index option returned a very strong 26.67% for the year while the International Shares Index (unhedged) option returned 23.81%, reflecting the large bounce back from the lows of the COVID-19 pandemic recession in early 2020.

The Property Securities Index option, which invests in property securities on the Australian Securities Exchange, returned a solid 25.48% over the year. The industrial property market has performed well, catering for the distribution and storage requirements due to the continued demand for online shopping, particularly with the recent protracted lockdowns in Sydney and Melbourne. The office sector has also remained resilient through the pandemic. 

To view your investment mix and check on the latest performance of your portfolio, log into your account or register for access on My OnePath

ECONOMIC AND MARKET UPDATE

Recovery continues but at a more sustainable pace

The global economy continues to recover from the short, sharp pandemic slump that occurred through the first half of 2020. While the pace of recovery has slowed back to a more sustainable pace from the 2020/21 surge, the outlook remains positive. That said, the global economy is facing into stronger headwinds with challenges including:

• The spread of the more contagious Omicron variant
• China restructuring towards the consumer, including getting serious about curbing excessive debt-fuelled property speculation, with the crisis surrounding property developer Evergrande a prime example of this shift
• Soaring energy prices following supply shortfalls in commodities including gas and renewable energy production
• An intensification of consumer demand for goods, pressuring global supply chains and causing prices to rise.

Let's face into the headwinds

Close to 50% of the world's population now has some immunity to COVID-19[1]. Steady vaccine progress has seen the pandemic become a much-reduced drag on economic growth - while the rapid spread of the Delta and Omicron variants has been more challenging, vaccination rates have dramatically reduced hospitalisations and deaths. The pandemic isn't over yet, but many parts of the economy have shown an ability to continue 'business as usual' with other sectors now benefitting from re-opening.

For China, new consumer focussed policies will hinder economic growth in the short term but mark a welcome re-orientation of the economy. Debt-led property investment has pushed housing prices in China's major cities to completely unsustainable levels that would make even Australia's property boom pale into insignificance.

The severe shortage of electricity in China is due to a reduction in imported coal, weaker hydroelectric outputs due to drought, and government emission reduction targets that has forced coal mines to close. The shortage has caused blackouts and a need for energy rationing and is another factor shifting China towards lower but more sustainable growth.

While concerns about a permanent lift in the price of goods and services (inflation) are credible, central banks have undershot their inflation targets for some time and are still committed to getting back to target ranges. We think the current lift in inflation is temporary and will ease back, but may remain elevated should labour shortages and rising wages become permanent. The key risk is of higher inflation becoming entrenched, slowing growth and draining policy support much more rapidly than currently expected. This would result in rapidly slowing earnings which would disrupt share markets.

The demand for consumer goods remains high, but many sectors haven't been able to get production back up and running quickly as economies have re-opened and this has caused prices to lift. We consider that supply chains will eventually respond and the spike in the price of consumer goods is likely to ease as supply is ramped up, although this could take some time.

Putting it into perspective

While some of the headwinds we've outlined above have contributed to the recent pause in markets - we shouldn't forget the incredible bounce back we've seen in the markets since the pandemic-driven recession took place. Considerable, unprecedented levels of policy support were put in place to sustain the recovery so it's expected that markets will become concerned that this extreme policy support will eventually be removed.

Now Australia has relatively high vaccination rates re-opening can begin. While slower Chinese growth may challenge the local economy, particularly as it has driven the recent plunge in iron ore prices, this has been offset by a surge in coal and gas prices. Although we don't expect energy prices to continue to rise through to 2022, this is supporting the Australian dollar and economic activity for now.

What may be ahead?

Most market challenges should ease in time. While the outlook has clearly softened, support remains in place with policy still incredibly stimulative and expected only to be removed gradually. Economies are continuing to re-open and social distancing will become less of a growth inhibitor.

This does not mean that the high 'pandemic bounce back' double-digit returns will last. We expect solid but more modest returns as the recovery matures, as growth eases and costs rise. All up, it's still a positive market outlook story.

“The global economic recovery is holding up and while the pace has slowed to a more sustainable rate, earnings have remained strong, enhancing returns. Our approach is designed to deliver strong and consistent performance for the long-term and we remain focussed on our strategy that's designed to achieving financial well-being for our clients” said OnePath Portfolio Manager, Liam Wilson.

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