Hold up, the ASX200 is only 4% off its all-time high

It has been a tough year for the stock market in 2022 with a war in Eastern Europe and record high inflation have dominating the news. Furthermore, the drop in growth assets has been spectacular. Bitcoin has capitulated by almost 77% and the once exuberant technology sector has suffered some of its worst losses in years, with the FANG stocks dropping more then 35%. In addition, the S&P500 is on track to record its 11^th worst year in more than 96 years. However, one Index has performed admirably in the face of all the turmoil and that has been the ASX200 or the XJO, which is Australia’s largest 200 companies. Despite all the global volatility, remarkably, heading into the final month of the year the XJO is just 3.29% off its all-time highs.  This begs the question, why the ASX has been so resilient in the face of the macroeconomic environment?

A stable geographic region

Firstly, due to Australia being so far away from the conflict in the Europe it was shielded from much of the initial volatility that occurred in the early part of the year. In fact, to some extent the conflict may have helped many of the country’s major energy exporters. The conflict and inflationary pressure drove up energy prices to extreme levels pushing up the profitability of many of the companies who exported these resources.

Smaller Growth Market

Other sectors, including the lithium space have also been booming for much of the year supporting the overall mining sector. It is also important to note that unlike the USA, Australia has quite a small technology sector. There is no technology player with the size of Amazon or Apple on the ASX. This means the index was not as hamstrung by the big technology players as the US markets were. This most definitely added to the stability of the Australian market.

Relative Inflation

Australia has had relatively low inflation compared to many other countries. This allowed the country’s central bank the Reserve bank of Australia has had much more flexibility in adjusting the official cash rate. Australia’s year on year CPI figure was just CPI 6.9% for year ending November 2022 and with the inflation figure set to max out near 8% this is a far cry from the some of the figures thrown around the world including near 20% in the UK.

How will the ASX fair if 2023 brings a recession?

It is possible that the USA, the UK, and Australia are already in technical recessions. However, if a recession were to hit it may cause quite negative outcomes for Australian market. In 2008/2009 Australia was protected from the GFC largely due to its tremendous economic ties with China. China’s economy was growing at an exceptional pace and Australian companies were able to benefit greatly from this. However, this time around China’s situation is very different. Even prior to Covid 19 the country’s economy was slowing causing problems for some of Australia’s largest resource companies. Now with the country only just starting to emerge form lockdowns, it is difficult to know at what level the growth will be.

The factor that may hurt the Australian economy is the state of the real estate market. The number of new homeowners who took out mortgages during 2020 and 2021 is close to 300,000. With adjustable rates set to kick in and rates only going higher and housing prices coming down, the market may be due for a bit of a downturn which may put immense pressure back on the overall economy.

The ASX200 has shown itself to be one of the most resilient indices over the last year and it should hold it in good stead going into 2023. A recession may complicate the economic situation but for the moment it looks poised to test its all-time highs in the medium short term.