JULY 2021: Finance Update
19 August 2021
Things look positive, but the biggest risk is complacency
The recent increased number of COVID-19 cases in Australia and in some parts of the globe, highlights how quickly things can change and why it is critical that portfolios are diversified and have some protection.
Markets have continued to be buoyed by strong performance and despite continuing concerns regarding inflation, the markets had some relief as bond yields pulled back over the quarter. Key Central banks have taken the view that much of the rise in CPIs is due to supply/demand imbalances caused by Covid, and that these imbalances will diminish and alleviate some of the current inflationary pressures. While we expect inflation to rise over the next six months, we believe that it will subside.
Policy settings also remains conducive to equity markets, with interest rates remaining low. In addition to supportive monetary policy, fiscal support also remains a continuing theme. Economic indicators such as employment figures, PMIs and consumer confidence all suggest that the economic recovery is well on track, with some indicators exceeding pre Covid levels.
July saw a contrast in global equity performance across regions, with emerging markets posting a 4.7% decline in Australian dollar terms over the month, whilst developed markets continued their strong performance, climbing by 4%.
Emerging market losses were driven by a deep sell-off in Chinese technology and education stocks towards the end of the month. Chinese education stocks were sold off in response to a ban on profit tutoring. The sell-off spread to the Chinese technology sector, shaving off a combined US$1.0 trillion in company value, with the MSCI China index posting its largest decline since March 2020.
Developed markets continued to rise over July, buoyed on by vaccine rollout, which has helped a strong Q2 2021 US corporate earnings results – with 87% reporting results above analyst estimates. Going forward, developed markets remain supported by near term fiscal policy initiatives with US Senate close to finalising a bi-partisan US$1 trillion infrastructure bill, whilst EU member states reached final approval of a €800b EU recovery fund support package.
The Australian share market reached all-time highs in July, with the S&P/ASX 200 gaining 1.1% for the month. This has continued into August with new all-time highs being seen. The Materials sector was the clear standout, benefiting from solid gains in both industrial and precious metals, which saw the Materials sector up 7.1% for the month. Industrials also performed strongly with a gain of 4.3%. Information Technology gave up some of the impressive performance seen in June, with the sector retracing 6.9%. Energy and Financials were also weaker in July, both falling 2.5% and 1.4% respectively.
Attention now turns to the reporting season which commenced late last month. Investors will be eagerly awaiting results to ascertain whether the rally from the Covid induced lows of last year has been justified. Impressive dividends, potential share buy-backs and increased M&A activity (e.g. Afterpay and Sydney Airports) can be expected to continue.
Fixed Interest saw a continuation of the Bond rally as yields fell. This fall in yields has been attributed to ongoing concerns over the impact of the Delta variant of Covid and doubts as to whether the Reserve Bank of Australia will continue to slow down their Quantitative Easing as Sydney remains in lockdown.
REITs in Australia advanced slightly during July, considerably less than in June. This is also attributed to the continued lock downs across Sydney, Brisbane and Melbourne.
CoreLogic’s July 2021 update stated Australian dwellings rose by 13.5% in the 2020-21 financial year, which was the highest annual growth rate since April 2004. Rents in June continued to increase with year to June growing by 6.5%.