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As I See It: March 2022

Hello as we move into Autumn here in Sydney!

Australian Storms

There have been very serious rainstorms in both Southern QLD and now Northern NSW and our immediate thoughts are for clients, friends and family effected in these areas. Conditions may well deteriorate in Sydney in the next few days and as such we must be vigilant and stay off the roads if possible. All team members are safe and working normally and here to help any clients who are in any difficulty. It does put life in perspective and hopefully we can get through this and there is adequate insurance to replace the property losses we are expecting.

Australian Economy

The Australian economy had a very strong recovery in the last quarter of 2021 bouncing back 3.4%. The graph below shows the sharp turn around as we recover from the lockdowns caused by the Coronavirus. With our borders now open to overseas visitors and foreign students who are vaccinated we should see quick improvements in labour shortages, and this should also assist in inflationary pressures abating as transport and freight forwarding costs normalise.

Economic Growth- 3.2% December quarter and 4.2% for 2021
Source:  ABS


The world is watching with horror at the invasion of the Ukraine by Russia in the last few days shattering 30 years of relative peace after the fall of the Berlin wall and breaking up of the USSR. The current position is uncertain and naturally we are limiting the placement of new funds into equity markets until a clearer picture arrives. Global financial sanctions have been placed on the Russian leadership and the Rouble has collapsed and their banking system falling into default. Several major Russian Banks have been expelled from the SWIFT inter- bank trading platform which effectively paralyses their capacity to transact with counterparties. The Russian central bank lifted interest rates from 9.5% to 20% to seek to delay capital outflow but now just a matter of a few days before the ATM machines run out and there will be long lines of Muscovites outside their banks demanding their savings back. The Europeans and in particularly the Germans have sent lethal weapons to help the Ukrainians defend themselves while at the same time Russian troops are descending on Kyiv and there is a high likelihood of a major protracted battle unless cooler heads prevail.

Location of Russian Control and Attacks
Source:  Bloomberg

There is some history with previous invasions into both Georgia and Crimea which was settled in a few days with an overthrow of the Governments replaced by Putin acolytes. By coincidence I was with an Australian Delegation in Moscow for the Georgia conflict and saw first- hand the effects of sanctions on their two stock markets (one domestic and one international catering for their oligarchs in London). This was 14 years ago in 2008 and with an ageing Putin and greater access to social media the current dynamic is very different and much harder to control centrally. What may have been a playbook of taking historical Russian territory and removing a pro west democratically elected Government has now embodied much of the Western Democracies to put a line in the sand and stand up once and for all to Russian aggression.

Sanctions will impact on gas and oil prices in the short term and there is the potential for a domino effect on companies with any significant financial exposure to Russian interests. At this stage Australia has minimal direct exposure and our domestic fund managers and superfunds have liquidated their small holdings in the region. GASPROM Russia’s largest company who I had visited in 2008 fell by 40% in London yesterday and their domestic stock market remains closed. The next step after sanctions will be the forceful sequestration of the Oligarchs overuses assets particularly in London in an attempt to weaken Putin’s power base. Global equity markets so far have been minimally affected but clearly this could change if the war develops into a larger escalation. Australia as a net exporter of natural resources is well placed to assist in meeting the demand shortfall and provide stability at this very difficult time.

Historical Impact of War on Share Markets
Source:  Yahoo Finance

Australian Interim Company Results

The interim results season just concluded was very strong and better than analysts’ expectations. Particularly pleasing was the significant increase in dividends declared which is now returning to pre- pandemic numbers. Our largest bank CBA was particularly strong and reported that in aggregate borrowers were up to 4 years ahead in their mortgage payments. This combined with significant asset appreciation for residential property over the last two years should mean there is minimal risk of credit losses should interest rates rise later this year. This is important as the four major banks still account for around 50% of the total dividend pool is aggregate on our market. Generating a predictable fully franked annual income stream at around 5% allows investors to ride out short term market volatility in share markets and will fund Allocated Pension drawdowns and payments.

International Equities

Markets have naturally been volatile given the current war but at this stage has held up well. Indeed, it may be that markets will rally strongly if there is a quick and peaceful resolution. In the short-term petrol prices and energy costs more generally will rise but this should subside as global reserves are released to meet demand and the wider trend to the use of renewable energy. It is also less likely that there will be significant interest rate rises while the current uncertainty continues which makes equities more attractive. Remaining disciplined and objective in our decision making with a long-term time horizon remains the best strategy for managing the regular short term market volatility which is a regular feature of investment markets.

Domestic Property

Their does appear to be a slowdown in the growth of stand- alone properties in Sydney and Melbourne over the last few weeks which will be welcomed by our regulators and make market intervention less likely. With overseas visitors returning to Sydney, you should expect inner investment properties to have a good year of growth and as a leading financial indicator rents have significantly increased in recent times.

Slowdown in Monthly Residential Growth – 28/2/2022
Source:  Corelogic

Average Views per “for rent” Listings
Source:  realestate.com.au

Local News

With the covid virus now appearing to abate we are all looking forward to getting out to see clients face to face. It has been a difficult two years for many in our communities and we will be holding additional client functions to provide opportunities for us all to meet and reclaim our normal lifestyle. We are as busy as ever and welcome your referrals at info@virtueandpartners.com.au. Our website www.virtueandpartners.com.au  provide a wealth of detail and resources to support our services to clients and is continually being updated.

We look forward to seeing you all soon

Best wishes

Tony and Fiona

Posted by Dr Tony Virtue, Principal


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