Posted on 5/5/2021
Australian Equities: S&P/ASX 200 TR, Global Equities: MSCI World ex Australia NR Index (AUD Hedged), Australian Fixed Income: Bloomberg AusBond Composite 0+ Year Index AUD Global Fixed Income: Bloomberg Barclays Global Aggregate TR Index (AUD Hedged), Australian Real Estate Investment Trusts: S&P/ASX 300 A-REIT TR Index AUD.
There were clear winners and losers on the ASX over the quarter. Driven by a ‘reflation trade’, value stocks outperformed their growth counterparts; Financials (+12.14%) and Energy (+3.26%) against Information Technology (-10.3%) and Healthcare (-2.15%). Behind these numbers is the improving economic outlook and corresponding rising bond yields that are fueling the rotation into cyclical and value-centric sectors as investors adjust their future interest rate expectations. This is a headwind for growth-orientated sectors, as a higher discount rate is applied to future earnings to reflect the increase in a company’s cost of debt.
The February labour force figures from the ABS showed 88,700 jobs were added (Full time +89,100. Part-time -500). The participation rate was also unchanged but has noticeably increased by 0.2pts over the year to February. The next test for the labour market will be the expiration of JobKeeper at 31 March, at the end of the program there were an estimated 900,000 recipients (at its peak around 3.6million Australians were receiving JobKeeper payments).
In the U.S., the Biden administration’s USD1.9 trillion pandemic relief package was signed off, paving the way for an estimated 85% of Americans to qualify for the USD1,400 stimulus cheques, this takes the total value of stimulus since COVID-19 began to USD5.2 trillion. The US unemployment rate is at 6.2% and the participation rate steady at 61.4%. Most job gains were observed in leisure and hospitality sectors (i.e. restaurants and bars) as restrictions eased and the infection rate recedes. Economists noted that the uptick in jobs suggests the labour market is responding to the December stimulus package. This implies further gains down the line after this latest stimulus packages makes its way throughout the economy. The Biden administration’s vaccine program also set a strong pace achieving its goal of 100 million doses in the first 100 days in office roughly 6 weeks earlier than expected.
In the commodities space it was a choppy month for oil, copper and iron ore, while gold struggled against a stronger currency and rising bond yields (as it is a non-yielding asset). As a function of both the vaccine rollout (rising demand) and a surprise production cut (lower supply) of 1 million barrels per day from Saudi Arabia the price of crude oil shot up, but a stronger USD eased price momentum. Copper claimed a 9-year high on increasing demand expectations; President Biden outlined intentions for a USD$2 – 4 trillion infrastructure plan with a centerpiece around renewable energy, batteries, electric vehicles and charging stations networks. Iron ore also etched out a 9-year high on demand outlook but quickly retraced these gains after the National People’s Congress in China announced it would be targeting 6% GDP growth in 2021, much lower than market expectations.
The Fixed Income sector came into the spotlight as yields rose sharply. Across the quarter the Australian Government 10yr yield jumped from 0.97% to 1.74%, its US counterpart followed a similar trajectory 0.92% out to 1.74%. However, yields across the 0–3-year bonds remained largely unchanged due to central banks bond buying (QE) programs. Over the coming quarter, investors should expect to see the post vaccine recovery to continue to support undervalued cyclical value stocks over expensive technology and growth stocks. Further disturbances in the debt markets from short term pockets of inflation may see some turbulence spillover in equity markets, however low longer-term inflation and central bank support should limit this risk. Trade tensions between the U.S. and China (and Australia by association) may also present as a key risk.
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