Reflecting a strong US lead, strong local data on confidence and jobs, and a bit of catch up, Australian shares rose 1.0% last week to a new bull market high and are now just 1.4% away from an ‘all time’ high.
Australia data has been strong. Consumer confidence rose in April to an 11 year high, business confidence remains strong and business conditions rose to their highest on record, all of which suggests that despite vaccine setbacks and snap lockdowns, the recovery remains on track and robust.
Surging jobs point to little impact from the end of JobKeeper, a slightly earlier than 2024 RBA rate hike and an even lower budget deficit. After a 70,700 surge in jobs in March, employment in Australia is now back above its pre COVID-19 level, which is unequalled by most comparable countries. Unemployment has also fallen to 5.6% which compares to its pre COVID-19 level of 5.1%.
With Japanese and Chinese shares down, US shares rose 1.4% to a new record high and European shares rose 1.3% to their highest since 2000, pushed by good economic data, a strong start to the US earnings reporting season, ongoing dovish comments from the US Federal Reserve and tame bond yields.
Vaccine rollout issues continue, with numerous uncertainties, but global recovery likely remains on track. Around 6% of the global population has now received one dose of vaccine, but this masks a huge divergence between developed countries (around 37%) and emerging countries (around 5%). Within developed countries, the UK is towards the front of the charge (at nearly 50%) and the US is at 38%. Australia meanwhile is well behind at 5% and Europe at 17%.
The Market Outlook.....
Shares remain at risk of further volatility from a resumption of rising bond yields and COVID-19 related setbacks. However, looking through the inevitable short term noise, the combination of improving global growth helped by more stimulus, vaccines and still low interest rates augurs well for shares over the next 12 months.
Global Shares are expected to return around 8% over the next year but expect a rotation away from growth-heavy US shares to more cyclical markets in Europe, Japan and emerging countries.
Australian Shares are likely to be relative outperformers helped by better virus control enabling a strong recovery in the near term; stronger stimulus; sectors like resources, industrials and financials benefitting from the rebound in growth; and as investors continue to drive a search for yield (benefitting the share market as dividends are increased, resulting in a 5% grossed up dividend yield). Expect the ASX200 to end 2021 at a record high of around 7,200, although the risk is shifting to the upside.
Unlisted Commercial Property and Infrastructure are ultimately likely to benefit from a resumption of the search for yield (income), but the hit to space-demand and hence rents from the virus will continue to weigh on near-term returns.
Australian home prices are likely to rise another 15% or so over the next 18 months-2 years, being boosted by record low mortgage rates, economic recovery and fear of missing out (‘FOMO’) but expect a slowing in the pace of gains as government home buyer incentives are cut back, fixed mortgage rates rise, macroprudential tightening kicks in and immigration remains down relative to normal.
Cash and Bank Deposits are likely to provide very poor returns, given the ultra-low cash rate of just 0.1%.
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