With another financial year closing it seems appropriate to recap what has been a remarkable 12-15 months for the world in all aspects of life, not just as far as financial markets and economies are concerned.
Covid remains the lens through which future projections and planning must be viewed. New variants around the world are causing further outbreaks and containment problems with devastating scenes coming from India, and countries such as Malaysia, Columbia and Argentina seeing new surges.
Along with heightening tensions around China, the biggest risk to market and economic recovery remains the virus getting out of control again.
Johns Hopkins University has some fascinating charts, including the animated time sequence chart of cases over time (click here):
Yet despite these obvious challenges, the world economy as a whole is rebounding strongly.
The International Monetary Fund has just revised its 2021 global growth Outlook from 5.5% to 6%, with 4.4% predicted for 2022 (up from 4.2%), and 3.3% annually to 2026.
While enormous stimulus packages such as the trillion-dollar infrastructure plan in the US have triggered fears of inflation, the broader view remains that there may be some short-term spikes in inflation but sustained structural inflation is a number of years down the road and the main driver of this scenario can only be wages growth. Most economists will note that there is quite a significant capacity gap to be taken up before upwards wages pressure can take hold.
Amid such strong growth conditions, the world’s financial markets have bounced back very strongly and the numerous portfolio managers we have spoken to over the past few months are uniformly optimistic that solid returns in share markets can continue, supported by a very low interest rate environment.
In its most recent report to advisers, Ausbil’s Head of Investments Paul Xirades noted: “November 2020, when successful Covid 19 vaccine trials were announced, marked the point of inflection for when the possibility of returning to a relatively normal living and working environment became a reality. The record-breaking global fiscal and monetary stimulus packages were already turning economic indicators back towards the positive. The vaccines meant that governments and business could put a plan around a return towards normality. While earnings for the 2020FY reporting season tanked by -22.6%, 2021FY has witnessed a dramatic turnaround in expectations from the prior reporting season”.
Their chart (below) illustrates the turnaround, sector by sector, from August 2020 (red) to February 2021 (blue).
Overall, though, the potential for sharp volatility remains, and the favourable growth conditions mentioned above do not necessarily apply to all sectors. For example, there is a boom in resource markets including a secular shift in infrastructure that is being driven by the rotation into renewable energy sources. An example of this is the rapid adoption of electric vehicles which is sparking a secular demand for bulk, base, and battery materials such as copper, lithium, cobalt, zinc, manganese, and rare earths that is expected to last for decades.
Another notable sector to benefit from a strong growth environment is the banking and finance sector, illustrated by CBA shares hitting an all-time high of over $100 this week.
In practice, these cyclical shifts and re-ratings highlight the need for good stock pickers when it comes to our equity exposures which is why we will continue to favour proven and reliable “active” investment managers rather than core positions in index funds.
To close, there is an awful lot going on in markets and global economies and how it applies to individual clients is dictated by their individual circumstances. As always, we urge you to take up your Review offers and get in touch any time in between meetings if you have questions or any matter you’d like to discuss.
Sources: Johns Hopkins University, RBA, Quilla Consulting, Ausbil Investment Management.