The Australian share market’s run of 11 straight gains ended in September, with equity markets down and bond yields rising.

This follows on from last quarter, where we reported rapid economic recovery and low interest rates that drove strong gains for the Australian share market.

The economy is headed for a weak start to the 2022 financial year, with the iron ore price falling significantly and Australia’s largest states (by GDP), NSW and Victoria, in lockdown for most of the first half of this financial year.

However, markets are often influenced by the future and with double vaccination rates estimated to hit 80 per cent by early November we can look forward to good news.

This vaccination rate means regions previously in lockdown will reopen and are expected to return to a normal level of social economic activity.

Additionally, the federal and state governments, as well as the Reserve Bank of Australia (RBA), continue to provide very accommodative financial conditions.

The Australian dollar remains depressed by Australia’s lockdowns and concerns about China’s relations and foreign policy issues.

In a recent speech by Australia’s treasurer Josh Frydenberg, he said that the economy has suffered a much lower than expected impact from China’s trade actions and that the Australian economy has shown “great resilience to date”.

China will most likely remain the main influence in the short term but the expected economic recovery in 2022 should provide support.

Future economic outlook

The two main risks that lie ahead for the immediate future include tensions between China and Australia and inflation.

We expect Chinese property issues to be largely contained within China and we expect inflation issues to subside as economic activity recovers in 2022.

The rollout of Australia’s vaccination programs and the development of new antiviral drugs gives us confidence that the worst of the COVID-19 pandemic and its economic impacts should be behind us in 2022.

With financial conditions very accommodative and economic activity likely to recover in 2022, it seems unlikely that the bull market is over.

Investors should remain cautiously optimistic and expect equity markets to recover into Christmas and the new year.

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