20 December 2021
Inflation, is it structural or transitory inflation?
Many market commentators, particularly in the US, are debating this question as the US inflation rate climbed to 6.5% in November - the highest rate in three decades. What is interesting is that we are observing a growing divergence between what is driving inflation in different countries, which is making the debate between structural and transitory inflation more nuanced.
There is no doubt that supply shortages related to Covid-19 have been putting upward pressure on input costs for many companies around the world. In recent company meetings conducted by Lonsec (our asset allocation and fund manager advisers), rising input costs were a common theme for many companies across a broad range of industries. These pressures should ease as supply chains reopen and as we emerge out of the pandemic, which is consistent with the transitory narrative.
From an Australian perspective, wage growth continues to be mixed. Wage growth, or the lack of, has been a key focus for the RBA and while wage growth remains low, the prospect of a rise in structural inflation is lower than other countries. In certain industries such as hospitality, staff shortages are pushing wages up, with some restaurants indicating that dishwashers are asking for $90 per hour due to staff shortages.
Australian Equities - waiting for the Santa Claus rally
The Australian share market declined for a third consecutive month with the S&P/ASX 200 falling 0.5% despite seven out of the eleven sectors in the Index finishing higher. Materials was the standout sector producing a return of 6.3%, whilst Communication Services (+5.2%) and Consumer Staples (4.5%) also contributed positively. Heavy declines in the Financials (-7%) and Energy (-8.3%) sectors weighed on the Index.
Local miners were bolstered by a slight recovery in the price of iron ore which was driven by China’s move to ease the recent liquidity crunch on the debt-laden property sector. The Financials sector was impacted by fears of contracting margins for the major banks as cash rates remain at record lows and competition in the home loan market continues to intensify. Weaker oil prices weighed on the Energy sector as concerns grow that the Omicron variant will further disrupt travel and lead to additional lockdowns globally.
Since the start of December the market has recovered somewhat with the S&P/ASX200 reaching 7400 again on 8 December and 7379 on 13 December 2021.
29 November 2021
In this article Shane Oliver, Head of Investment Strategy & Chief Economist with AMP Capital, outlines important long term implications of coronavirus for investors.
The key points from the article include:
Likely key longer-term implications flowing from the coronavirus pandemic are: bigger government; increased money supply and excess saving; increased geopolitical tensions; reduced globalisation; a faster embrace of technology; a greater focus on lifestyle; and a potential post-pandemic boom.
The biggest risk is of significantly higher inflation, reversing the long-term downtrend in interest rates.
28 November 2021
How is the global economy performing?
There are some very encouraging signs for the global economy, particularly within the European and American economies, with gains in terms of jobs growth as well as very positive business surveys. More concerning is a mature slowdown in China with impacts for Australia in terms of the iron ore price and demand for Australian commodities generally.
The global inflation story is showing an acceleration in prices across commodities as well as shipping costs and key materials such as computer chips. American inflation is now running at 5% in annual terms in September and a similar story is unfolding in Europe with inflation rates of 4%. Consequently, some central banks are starting to wind back or reconsider their bond purchasing and we have seen a sharp increase in bond yields over the last few weeks.
What is happening in the Australian economy?
Australia is now starting to show some very encouraging signs of recovery after the NSW and Victorian lockdowns. October saw the end of the worst of these lockdowns. This has resulted in a rebound in business and consumer confidence as well as job advertisements which suggest that the Australian economy should be back into growth by the end of 2021.
During the month, third quarter inflation data was released with underlying inflation coming in at 2.1% year-on-year, which was ahead of the 1.8% expected by the market. Inflation now sits within the bottom of the RBA’s target range of 2% to 3% for the first time in six years.
The inflation surprise dented investor sentiment in the Australian share market as expectations are mounting that the RBA will need to tighten much earlier than previously forecast. The prospect of higher rates will likely challenge equity valuations that have risen based on ultra-loose monetary and fiscal policy.
21 November 2021
On Tuesday 16th November, Boyce Financial Services hosted a webinar with Thomas Pickett-Heaps giving an economic update.
Covered in this webinar was
• Global Economic update
• Australian Economic & Market update
• What the above means for specific ASX sectors and stocks
The webinar was recorded and can be viewed below.
18 October 2021
Although we have seen some weakness over the last month, we are still supportive of risk assets (Australian and International shares and listed property securities) despite some of the risks outlined below. Bonds, including Government and corporate bonds, offer limited relative value in the current environment. However, we continue to see asset valuations rise notably in Australian equities and will continue to monitor valuations looking for opportunities to take profits where applicable. We also believe that ensuring that portfolios are diversified in their exposures will become more important in the coming 12 months.