The year in review 2021.

2021 was once again dominated by Covid 19. Global share markets were generally softer in November, with renewed uncertainty stemming from the emergence of the Omicron COVID variant seeing most major indices decline over the month.

As we enter December the Omicron  variant is reaching more countries around the world, but preliminary data indicates that hospitalisations across South Africa remain low, suggesting this is a less severe strain of the illness. Data that looked at recent hospitalisations across South Africa found that ICU occupancy was very low compared to when the country was facing the peak linked to the Delta variant in July. According to Discovery Health, one of the countries primary health insurers, the company was seeing as many as 500 members per day being hospitalised in mid-2021, while the current rate with Omicron added to the mix is about 35 per day.

OECD governments have spent about US$20 trillion on COVID support measures. With such massive business and personal stimulus, company earnings have recovered strongly and asset values have surged. In Australia alone, the value of residential property has increased by $2 trillion in a year to almost $10 trillion. The Reserve Bank lent nearly $200 billion fixed for three years at 0.1% for Australian banks to fuel a housing boom.  For many sectors of the economy, the cost of borrowing was close to zero, as central banks bought trillions of dollars of bonds and other securities. Awash with liquidity, markets entered a massive ‘risk on’ where asset values were pushed up in the buying spree. The Australian Sharemarket is now up 16.72% as at the 30th of November and Global Markets up some 26.81% and the US S&P 500 rose 26.10%.

Inflation continues to be on everyone’s lips. There is no doubt that supply shortages related to COVID-19 have been putting upward pressure in input costs for many companies around the world. The US for example, recorded an annual rate of inflation of 6.2%, the highest rate in three  decades. From an Australian perspective, wage growth continues to be sanguine. Apart from certain industries such as hospitality, where staff shortages are pushing wages up, with some restaurants indicating that dishwashers are asking for $90 per hour due to staff shortages. Out of control rising prices are like Covid 19 to an Economist. The primary tool to prevent rising costs is to lift interest rates in an attempt to curtail spending. In October we had large sell in Bonds as markets factored into account an interest rate rise two years down the track.

Looking ahead to 2022 , assuming that vaccines prove to be effective against the Omicron variant, we see the outlook as positive, with ongoing economic recovery, underpinned by relatively low interest rates and continuing stimulus measures. Further, we look forward to the return to a more “normal” economic environment , as tapering and rate rises start to see the distortions caused by extremely low interest rates and unconventional monetary policy abate.

Domestically, the end of the COVID lock-downs and reopening of borders is set to see activity pickup and we would expect the economy to bounce back strongly, just as it did following previous lock-downs. Key economic indicators continue to be strong and while there are some concerns around supply chain issues and inflationary pressures, both corporates and consumers are in good shape. If this improvement continues, then corporate earnings and dividends are likely to continue to grow over the coming year.