The eighteen months from the end of March 2020 to September 2021 will go down as one of the most astonishing periods for the Australian share market. The ASX200 Accumulation Index jumped more than 50 per cent, taking pretty much everyone by surprise after expectations had been hammered by the wholesale closure of the global economy.
The 2021 financial year saw Australian companies report 27 per cent earnings growth, the best in more than 30 years, albeit bouncing off a low prior year comparison. After companies slashed dividends the previous year, cash holdings surged to a record $211 billion and dividends bounced back ferociously, almost doubling year over year.
Record iron ore prices underwrote spectacular dividends from the big miners; banks were awash in capital with a surging housing market and record low funding costs, and retailers reported record years as households spent up on tech and home improvements. There’s no question, the last 18 months have been very good to Australian share investors.
However, investors should be wary of presuming the Australian economy will continue to show the same resilience. There are at least three identifiable headwinds that warrant keeping a careful eye on.
The first, and by far the most influential, is the dramatic reduction in federal government support for the economy, particularly while the two most populous states have been hobbled by lockdowns.
In 2020, federal government programs such as JobKeeper and the JobSeeker supplement saw the injection of $251 billion into the economy. By contrast, between 1 June to 23 August of this year, Deloitte Access Economics calculated it injected just $3 billion.
JobKeeper alone injected an average of $1.7 billion per week and peaked at $2.5 billion. As of 23 August, the new federal COVID Disaster Payment was averaging only $217 million per week. Many businesses and workers will receive a fraction of the financial support they got last year, if they get any.
Household savings are still much higher than pre-COVID levels at almost 10 per cent, and there is every chance there will be a surge of spending when lockdowns finally end, but it’s unlikely to be the spending spree we saw last financial year and understandably much of it may be spent on doing things, rather than buying more stuff.
A second headwind might come from the red-hot housing sector. One of Australia’s highest rated economists, Tim Toohey of Yarra Capital Management, points out the federal government’s HomeBuilder program was wildly successful, with single home building approvals jumping more than 30 per cent to a record high.
At the same time state governments were offering other incentives to home buyers and the big banks were given access to $200 billion in super cheap funding. The result: the housing market has rocketed.
However, those housing approvals are simply drawing demand forward, creating a spike now with an inevitable trough on the other side, which Toohey points out will be exacerbated by immigration stopping dead. Toohey’s base case is 150,000 excess dwellings by 2023 and an inevitable slowing of the important housing construction sector.
The third headwind could come from China, where the regulatory upheaval from Xi’s common prosperity dictums is having a profound impact, especially on the real estate sector, which accounts for 17 per cent of the country’s GDP. Purely for context (as opposed to drama), at the height of the Japanese and US real estate bubbles the sector accounted for about 7 per cent of each country’s GDP.
It’s unclear how the Chinese government will deal with the fallout from excessive debt levels of companies like Evergrande, and autocratic governments can do things politically accountable governments can’t, but it’s possible the property sector will need to undergo comprehensive restructuring which will reduce activity. The significance being China accounts for three times the value of exports compared to our second largest trading partner, Japan.
It is entirely possible these three headwinds will be more than offset by the ongoing circulation of last year’s unprecedented fiscal injection and the unleashing of animal spirits when lockdowns are finally lifted and the urge to spend those accumulated savings takes hold. However, as always it pays to be mindful those headwinds don’t knock you off course.
