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It’s time to reveal the 2021 X-Factor in investment markets

In the first half of 1982, Japanese institutional investors made a surprising move. They came into the Australian bond market in scale and quickly acquired 5% of Australian government bonds. At a meeting of investors in Sydney at that time, I suggested we call the sudden surge in demand in Japan for Australian bonds as the Factor X in our investment markets.

Forty years on, keeping a watch out for Factor X (in 2007 re-named as the X-Factor) has become an obsession of mine, even an addiction.

What is an X-Factor?

The X-Factor is the major influence on investment markets that had not been generally predicted or allowed for, but which came out of the woodwork with a powerful effect. My list of all 40 years of the X-Factors is set out below.

To be a fan of the X-Factor does not preclude taking a view on where the economy, inflation, shares, property, interest rates and exchange rates seem to be headed. Instead, it’s a reminder that investors always need to allow for the surprises and over-reactions that drive returns up or down often at short notice. Risk-management - including a sensible diversification - is always important to successful investing.

The effects on investors from the X-Factor can be negative or positive. Examples of the former are the near melt-down of global banking in 2008, the initial effects from the outbreak of Covid-19 in 2020, and the disruptions caused by the terrorist attacks in 2001. By contrast, Factor-X resulted in better-than-expected returns in 1991 when Australia’s trend inflation collapsed, and in 1998 and 2008 when our economy showed unexpected resilience during, respectively, the Asian financial crisis and the GFC.

The last 12 months provide a bounteous harvest of X-Factors, from which I’ve selected these finalists for the awards this year, presented in no particular order.

1. The shape of the pandemic

It’s in the nature of pandemics to quickly change their shape and impact, making it difficult to take a view on what the future will hold. In 2021 there have been many surprises from Covid-19 as mass vaccinations took place, variants (notably Delta and Omicron) emerged, and lockdowns came, went and returned. However, the changing shape of the pandemic and the uncertainties it generated were, for most investors, less of a worry than was experienced in 2020.

2. The global economy

The massive easings in budget and monetary policies announced by mid-2020 and maintained through 2021 have boosted the global economy, average share prices and many parts of property markets. The world-wide impact of the Covid-19 pandemic on global GDP and on most asset prices didn’t follow the L-shaped or U-shaped paths that were widely predicted. Instead, economic conditions and share prices tracked along the deepest and sharpest V-shapes ever seen.

Around the world, budget deficits are huge and will be for a long time. So far, the rapid increases in government bonds on issue have been funded relatively easily. Bond yields have moved up from their all-time lows but remain well below long-term averages, and many real interest rates are negative.

Looking ahead, the Reserve Bank’s forecast of 5.5% growth in Australian GDP in 2022 seems a big ask. But I share the thinking of Ausbil’s Paul Xiradis on the world economy, where he says:

... expect forward estimates for the next two years will be upgraded, driven by an under-appreciated pick-up in activity beyond Covid lockdowns ... the economic environment is favourable for shares and will be for the next year or so.”

I would add as someone already a little over-weight in shares, I’m happy to wait for periods of market weakness before topping up further on shares and I expect average return on shares in single digits in 2022.

3. Share market valuations

In rich countries, share market indexes have made strong gains over 2021, thanks to the combination of fiscal boosts, highly accommodative monetary policies, and negative real interest rates. There was also support from the good recovery in average profits and dividends after they collapsed in mid-2020. To quote Paul Xiradis again:

“I do not believe Australian equities are too expensive on average when you consider them in relative terms against where long-term interest rates are sitting, and their forward earnings growth outlook.”

4. Monetary policy … and inflation

Over much of the last two years, the dominant expectation in financial markets was monetary policy settings would remain highly expansionary for a very long time, particularly in the US and Australia where central banks have re-stated that higher interest rates were unlikely until 2024 at least and would await a pick-up in the pace of increase in nominal wages.

Recently, this near-unanimity of view of the outlook has fractured and the gap between the two camps could widen further. Many investors and commentators now expect higher interest rates in the US and Australia from 2022 or 2023. In the US, headline inflation jumped to 6.2% in the 12 months to September 2021, the highest rate of increase for 30 years. Canada, Korea and New Zealand have already raised their cash rates.

It seems to me that the majority of investors still view that recent increases in inflation as transitory. They’re focused on the short-run effects of supply disruptions, the temporary nature of high energy prices, and the boost in consumer spending as lockdowns were eased. The current bump in inflation is seen as disappearing as global growth slows, energy prices drop, globalisation picks up; and as unions have less power to raise wages than in earlier decades.

A growing minority of investors now expect inflation will be a lasting problem in the medium-term and longer. They emphasise: a continuation of supply disruptions; a quickening in wage increases led from businesses finding it hard to recruit or retain staff; perhaps, the return of expectations of higher inflation in coming rounds of wage negotiations; and they expect energy prices to increase as countries switch from coal, oil and gas to renewables.

And the winner is …

In my view, inflation isn’t transitory. Inflation could be 3-5% in a year’s time and then move up another notch or two. Thus, the widening split in expectations for inflation is my selection of the X-Factor for 2021.

See the full list below.

To all who read this article on the X-Factor, I wish for you good health, good humour and good investing in the years to come.


Don Stammer has been involved in investing for many decades as an academic, a senior official of the Reserve Bank, an investment banker, the chairman of nine companies listed on the ASX, and columnist for The Australian and Business Review Weekly. The article is general information only and does not consider the circumstances of any investor.


40 years of the X-Factor files

2021 The fracturing of the long-dominant view low inflation is here to stay

2020 Covid-19

2019 Strong share markets despite repeated predictions of global recession

2018 The impact from the royal commission on financial services

2017 The positive macro influences that, globally, restrained volatility, boosted shares and kept bond yields low

2016 Election of Donald Trump as US president

2015 Widespread experience of negative nominal interest rates

2014 Collapse in oil price during severe tensions in middle east

2013 Confusion on US central bank’s “taper” of bond purchases

2012 The extent of investors’ hunt for yield

2011 The government debt crises in Europe

2010 The government debt crises in Europe

2009 The resilience of our economy despite the GFC

2008 The near-meltdown in banking systems

2007 RBA raises interest rates 17 days pre-election

2006 Big changes to superannuation

2005 Modest impact on economies from high oil prices

2004 Sustained hike in oil prices

2003 Marked fall in US dollar

2002 Extent of US corporate fraud in Enron etc

2001 September 11 terrorist attacks

2000 Overshooting of exchange rates

1999 Powerful cyclical recovery across Asia

1998 Resilience of our economy despite Asian crisis

1997 Asian financial crisis

1996 Global liquidity boom created in Japan

1995 Powerful rally in US markets

1994 Sharp rise in bond yields

1993 Big improvement in Australian competitiveness

1992 Souring of the vision of “Europe 1992”

1991 Sustainable collapse of inflation

1990 Iraq invasion of Kuwait

1989 Collapse of communism

1988 Boom in world economy despite Black Monday

1987 Black Monday collapse in shares

1986 “Banana Republic” comment by Paul Keating

1985 Collapse of A$ after MX missile crisis

1984 Measured inflation falls sharply

1983 Free float of Australian dollar

1982 Substantial Japanese buying of Australian bonds


Chris Pappas
December 28, 2021

Don is probably right & he does have the runs on the board for his X-factor selection for 2021. I'll take a punt & guess the "Buy now pay later' industry & the current popular & attention seeking currency trading in bitcoin/crypto is my x-factor selection for 2022.
Chris P.

Warren Bird
December 21, 2021

But by definition the X Factor is something that "came out of the woodwork". Inflation didn't- it came out of the rapid rise in money supply growth in 2020 that saw many economists, who haven't forgotten basic macroeconomics, to predict a rise in US inflation above 5% in 2021.
Not the right choice of X Factor for me. That said, I'm not sure what else I'd go for.

December 19, 2021

Don I always read your articles, I don't always agree but mostly do, what it does do is make me go back and re-avaluate my belief and I end up with a much better idea. I have been in the market from a very early age, since 1963 so it takes somebody like yourself to convince me otherwise, love your articles, many thanks.
young KP

Stephen Tait
December 19, 2021

Don I always welcome your insights , and recall the factors X well.
I had to go back and recall what the ‘MX’ factor was all about.Ahh just - Politics!!!
The Feb 94 FOMC hike surprise was probably the greatest surprise for a bond sale desk, or Campbells & Simon’s portfolios at GIO….The CB still struggle with shaping expectations today as the ongoing Factor X

Marjorie J
December 16, 2021

Don - you are right on message as always and it's fantastic to have you're thinking on this and the outlook. I always feel reassured and can sensibly refocus after reading your OPED's. Thank you to one of Australia's great investment thought leaders. Marjorie

December 16, 2021

Always great articles from Don and valuable insights. What I want to know is his tips on the X-factor for 2022!

But then if we knew, it wouldn't be an X-factor! Is it the same as a Black Swan? Ha.

Jan H
December 19, 2021

I agree with Stephen: it is hard to prepare for an X-factor when you don't know it till it hits. However, Don's list shows that markets recover in time and the general trend is up. I must say I was seriously shocked by the GFC when it seemed that capitalism itself was ended. The big question is: if markets have always recovered in the past, will they do so in the future?

Campbell Dawson
December 16, 2021

I can remember Don and his X factors from way back and always thought it was one of the most sensible risk management protocols ever invented. Great to see Don is still active and making his usual sensible contributions to the investment dialogue.


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