OCTOBER 2021: Finance Update
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.
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.
Global Equities
Global markets saw a recovery in performance during October from a volatile prior month, with developed markets returning 1.65%, outperforming global small cap returns – which retreated by 0.6% in Australian dollar terms.
October was the best month of the year for the S&P500, driven by strong third quarter earnings results reported by the country’s largest companies with corporate profits up 36%. Further support for markets is expected as Washington comes close to approval of its US$1.85 trillion stimulus plan, which comes off the back of US$1 trillion infrastructure support package that gained Senate approval in late October.
Equities in the UK and Europe continue to rise in line with US markets, with inflation and a shift in FED policy remaining the most significant near-term risks for developed market equities. We have also seen some very encouraging signs in China with the property developer Evergrande making a debt repayment – and the Chinese sharemarket increasing by 3% for the month. Although Chinese GDP has returned to its pre-pandemic level, the broad reaching policy shift is expected to dampen growth in the near term. The continued regulatory tightening in China remains a persistent issue with a newly proposed real estate tax weighing on the property sector.
Elsewhere, retention of Japan’s sitting prime minister is expected to support Japanese investor sentiment going forward, as political uncertainty caused foreign investors to become net sellers of Japanese equities leading up to the election in the final week of October.
Australian Equities
A late selloff for the Australian share market led to modest overall losses for the month, with the S&P/ASX 200 retracing 0.1%. Information Technology was the standout sector, gaining 2.1% for the month, with Health Care (+1%) and Financials (+0.8%) also contributing positively.
Industrials were the biggest lag on the Index, falling 3.2% as inflation fears weighed on investor sentiment in the sector. Energy also pulled back with a decline of 2.7%, unwinding some of the impressive gains from the previous month.
Fixed Interest
Australian Fixed Interest markets were hit hard in October, with the bulk of the losses being driven by a sharp increase in the 2 and 3 year Australian Government Bond yields at the end of the month. Markets had begun to doubt the Reserve Bank of Australia’s (RBA) conviction in keeping the 2 year rate held at 0.1%, and begun to sell off the issue in earnest on the 28th of October.
The RBA failed to defend their ‘yield curve control’ target, leading to the yield rising by more than 50bps over the course of the day, reaching more than 0.75%. The RBA formally dropped the 0.1% yield curve control target in the following week. The longer end of the curve also saw increases, with the 10 year yield exceeding 2% for the first time since 2019. These increases in yields drove a return of -3.55% for the Bloomberg AusBond Composite 0+ Yr Index over the course of October, as credit spreads remained relatively static and had little impact on the month’s results.
The significant yield shift was primarily an Australian affair, as the RBA is one of the only central banks in the world to have deployed a yield curve control policy. As such, returns were much more muted internationally, with the Bloomberg Barclays Global Aggregate Index (AUD Hedged) returning -0.26% in October, with currency fluctuations resulting in a return of -4.06% for the unhedged variant.
REIT’s (listed property securities)
The S&P/ASX 200 A-REIT Accumulation Index finished 0.42% higher in October, equating to a one year return of 30.87%. Global real estate equities (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) advanced strongly, finishing 5.80% higher, equating to a one year return of 42.67%.
Nationally, the housing market once again advanced further, showing considerable strength, with the CoreLogic 5 city aggregate recording a 1.36% increase for the month. Perth was the only city to record negative growth, albeit -0.10%. Hobart is leading the way for year-on-year change, with all dwellings advancing 28.07%, significantly above the 5 city aggregates 20.63% for the same period, which has now broken last month's record of highest one year growth rate since June 1989, according to CoreLogic’s data.