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Financial Year Wrap

FINANCIAL YEAR WRAP

A stellar performance by every fund manager on the planet this financial year, as they all pat themselves on the back for their Buffet-like returns to close out 30th of June.  But is everyone a genius? Or is it that the whole market was simply red hot and they were along for the ride?

Well, if you delivered returns below an enormous 37.4% for the year, you actually underperformed, as that was the return of the MSCI All Country World Stock Market Index, which is a broad measure of global equity markets in developed countries. The ASX 200 delivered returns of 27.8% including dividends, which could be seen as underperforming relative to other equity markets, however an incredible return all things considered. This was ASX’s best year since 1987, which many would remember as the year of the famous Black Monday stock market crash.

In this week’s update, we will take a look at the performance of a number of asset classes for the financial year and look behind some of the drivers.

First to equity markets and the US is the stand-out performer. The S&P500 managed to post a ridiculous +40.8% in the past 12 months as the market recovered quickly from the initial pandemic sell-off in the earlier part of 2020. At first glance, you could say it was the result of the unprecedented stimulus, and economic recovery’, however, there is a very large number of Americans that are worse off than before the covid crisis, so there is an interesting dynamic at play here.

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Part of the reason behind the moves in equities is simply due to a huge rise in the popularity of retail trading accounts which offer leverage and options. Robinhood for example is an easy-to-use shares and options trading application that has seen explosive growth since the pandemic started. Total transactions on the application doubled from $150 Billion to $350 billion in 2020 as the rise of stay-at-home workers (or those who lost their jobs) flooded into the stock market in hopes to make quick gains. When you have enough people willing to take risks the underlying economy doesn’t really matter in the short term, it’s all about money flows, and the market has been in a state of complete euphoria with investors buying anything with a stock ticker. Every sector moved higher in the past 12 months. Robinhood trading accounts have grown to 18 million in 2021 and it doesn’t seem to be slowing down just yet.

We can see the popularity of highly leveraged trading accounts on Wallstreet Bets having a big impact on the moves in particular stocks that are popular such as AMC or Gamestop. The retail herd is driving a large portion of the gains in equities, and this is not something that should give you confidence moving forward.

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So no, it is not the underlying economic strength that is delivering the 40% gains to equity markets in the US. It is a combination of both fiscal and monetary stimulus combining with an appetite for risk which is at the level of the Dotcom Bubble of 1999. This past financial year’s performance in equity markets should not give you the confidence to move everything into the share market to chase your neighbor who boasts about their gains in a random ASX listed company with no earnings or revenue. The market right now is incredibly dangerous and everyone is winning. These periods are usually followed by an incredibly painful realisation when the momentum finally ends. Knowing when it ends is the hard part, so adjusting portfolios whilst the going is good is something that should be prudent as we move into the new financial year. The reason we know we are in a bubble is when we look at historical valuations. There are only a few points in history where the market was more overvalued, and by many measures the US market today is the most overpriced in history.

In Australia we have seen a significant impact in the resources sector with much higher commodities prices leading to improved earnings. But another trend we have seen across the market is the outperformance of companies with smaller market capitalisations. A lot of the companies that have performed quite well in recent times have been the ones that inexperienced, first-time investors gravitate to. The ones with flashy presentations and no underlying revenue or earnings. The ones your taxi driver or next-door neighbor give you the hot tip on. Companies that don’t quite yet have any cash coming in, but are promising to change the future. Small caps in Australia were up 33.2% compared with 27.8% for the ASX200. The market cap weighted PE ratio for the Australian stock market is seen below via Market Index and we can see the huge spike higher due to the result of both a sharp drop lower in earnings combined with a move higher in the market. For the most part, the dramatic rise in equity markets globally has not been underpinned by rising earning, it has simply been money pouring into financial markets driving valuations to record highs.

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To property prices now, and the housing market in Australia has posted its highest annual growth rate in 17 years with prices soaring 13.5% as an average. Sydney keeps bubbling away even higher, but even Darwin and Hobart both posted a circa 20% rise for the financial year. Is everyone really that much wealthier due to the pandemic?

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If we look at property price drivers, you can no longer say that immigration has had a positive impact, as we’ve essentially been in a restricted bubble the whole time. If we look at wages in Australia as a whole, you cannot say that the pandemic has had a positive impact on take home pay on average. So, the obvious drivers would appear to be FOMO (a ‘fear of missing out’ from individuals scared of ever-increasing property prices), record low interest rates, and a significant drop in lending standards.

The RBA has recently been attempting to warn banks and financial institutions to maintain lending standards as wage growth struggles. But banks will be struggling to hit loan targets with weaker wages and ever-increasing property prices leading to buyers demanding higher loans. So naturally it makes sense to see lenders find any excuse to fudge a number here, report lower expenses there, and get a home loan across the line assuming we will see an economic recovery in the near future.

If Australia is forced into more lockdowns moving forward, as different strains of COVID continue to mutate, then we will only see more businesses shutting their doors and wages continuing to struggle. The reckless lending standards of today will likely come back to bite the banks in the future.

For precious metals prices, it was a bit of a mixed bag to round out the financial year, with gold in AUD terms pulling back 7% and silver gaining 33% in the past 12 months. Gold came under pressure since August of 2020 with profit taking and ETF outflows. But silver has held up incredibly well considering the price doubled in less than six months from March to August 2020. The Gold/Silver ratio dropped from 98:1 to 68:1, so congratulations to those who took advantage of the record higher GS ratio in early 2020.

In summary, the pandemic has had one impact that is undeniable. The rich have gotten much richer and the poor much poorer. It is strange to think that a global pandemic would have led to such amazing performance across equity markets, but once again it seems that the policies of governments and central banks in response to the crisis, coincidentally, led to an even greater gap between the rich and the poor. Billionaires were reported to have enjoyed a $4 Trillion boost to their net wealth between March 2020 and March 2021, an increase of 54% in a single year! Meanwhile the number of people living in poverty globally doubled to more than 500 million during the first nine months of the pandemic. Something is clearly wrong with the system. The recent performance of the global stock market should be seen as a gift to those invested, and perhaps an opportunity to reallocate and diversify.

At this stage there is nothing that gives confidence that the COVID-19 problem has been solved indefinitely. There is a very strong argument that we could well be living in crisis for the next five years or more if the virus mutates faster than we can vaccinate against new strains. The uncertainty of the future has been completely ignored by participants in the stock market, and we could look back at this time as a unique psychological event in which irrational exuberance, euphoria and herd mentality has dominated the psyche of investors yet again. Yet another 1929, 1987 or 1999 moment in time.

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Panic at the Sydney Stock Exchange on October 20, 1987 as markets tumbled following Black Monday in the US– Antonin Cermak

A stellar performance by every fund manager on the planet this financial year, as they all pat themselves on the back for their Buffet-like returns to close out 30th of June.  But is everyone a genius? Or is it that the whole market was simply red hot and they were along for the ride?

Until next week,

John Feeney

Guardian Gold Sydney

If you have any feedback or questions about this report, you can contact John Feeney direct at johnf@guardianvaults.com.au

Or on Twitter @JohnFeeney10

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Disclaimers: Guardian Vaults Holdings Pty Ltd, Registered Office, Scottish House, 100 William Street, Melbourne, Victoria, 3000. ACN 138618176 (“Guardian Vaults”) All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from the publisher and/or the author. Information contained herein is believed to be reliable, but its accuracy cannot be guaranteed. It is not designed to meet your personal situation. Guardian Vaults, its officers, agents, representatives and employees do not hold an Australian Financial Services License (AFSL), are not an authorised representative of an AFSL and otherwise are not qualified to provide you with advice of any kind in relation to financial products. If you require advice about a financial product, you should contact a properly licensed or authorised financial advisor. The information is indicative and general in nature only and is prepared for information purposes only and does not purport to contain all matters relevant to any particular investment. Subject to any terms implied by law and which cannot be excluded, Guardian Vaults, shall not be liable for any errors, omissions, defects or misrepresentations (including by reasons of negligence, negligent misstatement or otherwise) or for any loss or damage (direct or indirect) suffered by persons who use or rely on such information. The opinions expressed herein are those of the publisher and/or the author and may not be representative of the opinions of Guardian Vaults, its officers, agents, representatives and employees. Such information does not take into account the particular circumstances, investment objectives and needs for investment of any person, or purport to be comprehensive or constitute investment or financial product advice and should not be relied upon as such. Past performance is not indicative of future results. Due to various factors, including changing market conditions and/or laws the content may no longer be reflective of current opinions or positions. You should seek professional advice before you decide to invest or consider any action based on the information provided. If you do not agree with any of the above disclaimers, you should immediately cease viewing or making use of any of the information provided.