Resilient Australian Stock Market Outperformed in 2022, Supported by Mining and Energy Stocks

Australia’s blue-chip stock index, S&P/ASX 200 ended down 5.45% to 7,038.7 in 2022. On the last day of the trading year the ASX was up +0.3% and -0.9% for the week. This compares to 2021 being up over 13% for the year. Australian shares ended 2022 as one of the region’s more resilient markets with mining firms supporting as globally stocks were pummeled. The end to an era of low interest rates that made borrowing cheap and encouraged investors to take risks in the hunt for lucrative returns destroyed many portfolios globally. The S&P/ASX 200 beat 19% declines across the S&P 500 and the MSCI Asia Pacific Index.

Coal and oil stocks led the index with the global price surge sparked by the war in Ukraine. The ASX is a resource-heavy bourse and the extreme moves in commodities prices added to volatility. Major commodities initially rallied this year on supply disruptions brought by Covid and the war in Ukraine, before retracing much of those gains on demand destruction from rising interest rates and growing recession fears.

Despite the relative strength the ASX still its worst annual performance since 2018. It has been a volatile time for investors, with Covid, lockdowns and wars. In 2020 it lost just over 1% in 2020 and had a gain of over 20% in 2019. Surging global inflation prompted one of the most aggressive tightening campaigns by central banks worldwide.

The Reserve Bank of Australia joined in the rate raising after pledging late last year to keep the cash rate at a record low of 0.1% in 2022, before raising interest rates by an aggregate of 300 basis points for eight consecutive meetings. Technology and real estate shares languished near the bottom as rising interest rates and inflationary pressures weighed on the sectors. The RBA has now hiked the cash rate to 3.1%, the highest since November 2012, and said that it expects to tighten further in an ongoing effort to bring down inflation.

Best Performing ASX Stocks in 2022

Coal and Energy

  • Whitehaven Coal Ltd. (+303%)
  • New Hope Corp. Ltd (+194%)
  • Woodside Energy Group Ltd. (+64%) 

With Australia being one of the world’s biggest exporters of coal and natural gas, benefited from record prices in coal and 12-year highs in Natural gas. Australian coal stocks also rallied as Russia’s invasion of Ukraine disrupted global energy supply. 

Whitehaven Coal gained more than 300% for the year to top the ASX. Analysts price targets compiled by Bloomberg suggesting a 9% advance over the next 12 months.

“Demand for coal usually peaks in January, so some of these shareholder returns could grow into the new year as the energy crisis continues,” said Jessica Amir, a strategist for Saxo Capital Markets based in Sydney. But coal prices may “lose heat before the mid year, as Europe and US head into summer and thus demand for coal will cool.”

Lithium

  • Core Lithium Ltd. (+66%)
  • Sayona Mining Ltd. (+46%)
  • Mineral Resources Ltd. (+43%)

With the surge in energy prices and move towards electric vehicles lithium miners showed solid gains. Interestingly the high cost of these commodities hit the EV market hard forcing car makers to rise prices. The result has seen Tesla lose over 66% of its share price in 2022. Core Lithium was the top Australian stock in the sector this year.

“2022 saw lithium stocks reach new highs as a higher-for-longer outlook took hold,” said Saul Kavonic, an energy analyst at Credit Suisse Group AG. 2023 could prove a pivotal year that tests the thesis “as more supply comes to market and the demand trajectory risks wobbling amid global economic slowdown,” he added. 

Iron Ore

  • BHP Group Ltd. (+25%)
  • Rio Tinto Ltd. (+15%) 

For those familiar with investing in Australia, be it in the Australian dollar or the stock market understands the significance of iron ore with Australia dominating the commodity globally. BHP and Rio Tinto are the world’s largest commodity companies and rallied hard as iron ore hit a five-month high near the end of the year. The world’s biggest iron ore consumer, China reversed its Covid Zero policy raising demand.

Worse Performing ASX Stocks in 2022

The top of the decade plus long bull market that rose 600% came just after the S&P 500 hit a record high on January 3. Tesla rose 13.5 percent that day. Then what was to become the pattern hit markets. On January 5 the Federal Reserve released the minutes from its previous meeting which revealed Fed were so worried about inflation that they thought they might need to accelerate how fast they raised interest rates. The two sectors that would be hit the most, Technology and Property. The aforementioned Tesla would fall 66% from that day.

Technology

  • Novonix Ltd. (-83%),
  • Megaport Ltd. (-67%)

Battery materials supplier Novonix was the worst hit as operating losses rose (the flip side of the lithium miners’ successes). Cloud services provider Megaport was the second worst as cheap money was gone and overvalued tech companies came down to earth. The ASX tech sector’s fell 34% in 2022.

Property

  • Centuria Capital Group (-49%) 

Centuria had the biggest decline among the property names. While interest rates didn’t rise as fast and high as other countries higher borrowing costs hit the sector. Australia’s housing-market downturn has not been as drastic as the US for example. Bloomberg Economics is expecting a trough only in mid-2023. 

The Australian dollar moves around with the US dollar, the Japanese Yen and commodities prices. The Australian dollar fell 6.25% against the US dollar which made Australian commodities even more competitive when priced in US dollars. However, given much of Australia’s commodities feature with a larger inelastic demand base, some would say with largely a high percentage of captive customers.

The country was able to benefit from gains against the Chinese Yuan, Japanese Yan and South Korean Won, its largest export customers. Accordingly, Australia had huge trade surpluses in 2022 which was reflected in the mining and energy forms stock prices.

How Global Indices fared in 2022

Asia Pacific Region Equity Markets in 2022

  • Japan’s Nikkei: (-0.5% for the week/-9.4% for the year)
  • Hong Kong’s Hang Seng: (+1.0% for the week/-15.5% for the year)
  • China’s Shanghai Composite: (+1.4% for the week/-15.1% for the year)
  • India’s Sensex: (+1.7% for the week/+4.4% for the year)
  • South Korea’s Kospi: (-3.3% for the week/-24.9% for the year)
  • Australia’s ASX/200: (-0.9% for the week/-5.4% for the year)

Global Equity Markets in 2022

 Sources: TC, Bloomberg

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