The Australian share market gave back some of its recent gains in December, with the All-Ordinaries index falling by 3.5% for the month (closing at 7,221.7 points). For the 2022 calendar year the All-Ordinaries index (excluding dividends) fell by 7.2% - marking the 5th calendar year of negative returns over the past 13 years.
The Reserve Bank of Australia (RBA) increased the official Cash Rate in December by a further 0.25% per annum. The RBA Cash Rate now stands at 3.10% per annum and increased by a staggering 3.00% per annum over the last 8 months of 2022. The Australian Dollar was steady (as at the end of December), with 1 Australian Dollar buying 67.66 United States cents.
Global share market returns were generally weaker in December, with the United States Dow Jones Index falling by 4.2%, the London FTSE falling by 1.6%, the Japan Nikkei 225 falling by 6.7%, and the Hong Kong Hang Seng Index gaining by 6.4%.
The chart below shows the annual calendar year price return in the All-Ordinaries index from 2010 to 2022.
Source: Yahoo Finance, Apex Partners
While we are coming off a negative return in the Australian share market, as shown in the chart above, on a historical basis such returns are generally followed by a period of gains.
As I wrote in my December Market Wrap last year, I expected the key factor to monitor throughout 2022 was inflation and how central banks would combat this. Clearly, with Russia’s invasion of Ukraine, inflation was elevated and we witnessed unprecedented increases in interest rates by central banks globally.
As we enter 2023, on a domestic front, I expect interest rates to stabilise over the coming months and potentially reduce in the second half of the year.
The key factor to monitor, in my view, for the year ahead will be mortgage distress as borrowers struggle to meet higher mortgage payments as fixed rate loans start to convert to significantly higher new interest rate loans.
We have already seen sharp falls in property prices, with Sydney dwelling values falling by 12.1% for the year to December. Added to the fact that property sales are down, this could be a clear early warning sign of things to come this year.
Given the strong relationship between house values and the economy (with nearly 1 in 5 of every Australian worker either in construction or retail), I expect that the RBA will be forced to “pivot” on interest rates later this year to avoid a domestic “financial crisis” occurring.
For more information, please contact Ryan Love on 1300 856 338.
This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation, and investment objectives.