Australian economic data looked a bit confusing over the month, but it was mostly strong under the surface. Retail sales were up more than expected whilst consumer confidence fell (but is at its second strongest level since 2010).
Unemployment and underemployment are falling faster than expected, but at 5.5% and 7.8% respectively, we are likely a long way from full employment (nearer to 4% and 6% respectively). Therefore, sustained 3% plus wages growth is likely still several years away.
Australian shares were hit hard in mid-May due to inflation fears and concerns regarding China diversifying its iron ore supply away from Australia (which is not likely short term as there is not much spare capacity outside of Australia, with Australia accounting for 50% of global iron ore exports). Our market has clawed its way back though with strong gains in information technology, health, and retail.
The slide in cryptocurrency may be having a negative impact on share markets in the short term (as crypto speculators sell shares to cover their crypto losses) but it looks to be marginal with Bitcoin falling 50% since mid-April but shares remaining near record highs. The crypto plunge is unlikely to have much impact on broader economic conditions, as most have no exposure to crypto currencies and any negative wealth-effect will be swamped by ongoing stimulus. The banking system also has little exposure to them.
New global COVID-19 cases and deaths have slowed further however this trend masks the various countries which are seeing renewed upswings (South Africa, Malaysia, Vietnam, Taiwan). 10% of the global population has now received at least one dose of vaccine, with 7% in emerging countries and 35% in developed countries. For your interest – UK is at 56%, US at 48%, Europe at 35% and Australia is at 14%.
The Market Outlook…..
Shares remain at risk of a short-term correction, with possible triggers being the inflation scare, US taper talk and rising bond yields, COVID-19 related setbacks, US tax hikes and geopolitical risks. Looking through the inevitable short term noise however, the combination of improving global growth and earnings helped by more stimulus, vaccines and still low interest rates augurs well for shares over the next 12 months.
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 on 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 ultra-low mortgage rates, economic recovery and fear of missing out (‘FOMO’) but expect a progressive 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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