Crystal Wealth Newsroom
Economic update: living with COVID-19
In Australia, it was an impressive corporate earnings reporting season despite COVID-19 lockdowns in Sydney (number two) and Melbourne (number six).
According to Commsec data, average reported company revenues jumped 5 per cent for the financial year and profits rose 33 per cent.
Driven by the reversal of last year’s write-downs and earnings, these results have boosted most share prices. The broader market benefited from a vital lift in the grocery, banking and mining indices to aid overall returns.
On the dividend front, it was a win for income investors who had seen dividend payments fall by as much as 60 per cent over the previous 12 months after portfolio stalwarts such as the major banks cut payments heavily in 2020.
In total, some $38 billion in dividends will be paid out along with $15 billion in share buybacks (including Woolworths, Telstra, ANZ, NAB and CBA to name a few).
On balance, the Australian economy appears to be in a very strange position.
On the one hand GDP growth just beat expert predictions, reaching 0.7 per cent growth for the June quarter.
However, looking around the streets, the number of “For Lease” signs going up has increased markedly while residential and commercial construction projects continue to grow.
Residential property has continued to see strong price rises, although this is likely to slow next year as affordability worsens.
Consumer spending remains an important contributor to the mix, even though this has all but ceased to grow into the September quarter due to renewed lockdowns.
It is anticipated that the September quarter GDP numbers will be negative and while the December quarter prospects will remain unclear until we see more clarity around the ‘post-vaccination’ easing of restrictions.
The iron ore price has tumbled due to China steel reductions, however demand for coal and copper remains strong with the Australian dollar trading below US$0.73. The Australian equity market continues, admirably, to look through the current market dislocations, helped by a still solid global equity outlook, accommodative government and monetary policy and pent-up consumer demand.
U.S. economy demonstrate strength in the face of Delta
Offshore, as medically formidable as the COVID-19 Delta variant appears to be with case numbers remaining high in many parts of the world, its effect on economic output in major economies such as the USA has been minimal to date.
US GDP increased at an annual rate of 6.5% in the June quarter surpassing revised growth of 6.3% from the March quarter.
The S&P 500 climbed for seven straight months, its longest winning streak since January 2018. Inflation concerns, supply-chain constraints, labour shortages and the spread of Delta were not enough to keep the markets down.
The prevailing lower rates/inflation construct has also led to a potential investor shift into more risky investments as market volatility subsided, providing ready cash to support market dips.
Technology companies have generally led the way still followed by the broader market. The U.S. Federal Open Market Committee (FOMC) voted in August to leave the target range for its federal funds rate at 0%–0.25% and its bond-buying program unchanged for now.
CPI for July increased by 0.5% on a seasonally adjusted basis compared with June, having risen 0.9% a month earlier somewhat easing current inflation concerns.
Although the Federal Reserve sees inflation at recent levels as transitory, it sees risks skewed to the upside (i.e. meaning higher inflation).
Concerns about the spread of the Delta variant and inflation could continue to weigh on the markets in the short-term, although these have not stopped large-cap indexes from achieving new record price levels through August. Announcements regarding the timing from the US Federal Reserve on its ‘bond buying’ or ‘tapering program’ will be a key driver of market volatility in markets through the remainder of 2021.
European equities boosted by continued low interest rates
European equities were boosted by the European Central Bank (ECB) pledging to keep benchmark interest rates at historically low levels until inflation persists “durably” above its 2% p.a. target.
The ECB purchased large quantities of government bonds during the pandemic, lowering the yields on debt securities and making riskier assets, such as equities, more attractive on a relative basis. August saw further gains in European markets, led by Information Technology, Utilities and Health Care sectors as European economies “re-opened” and continued their strong recovery. Most companies posted their June second quarter earnings, so the percentage of European companies that beat analysts’ earnings estimates hit a five-year high during the period.
While eurozone consumer activity levels (like leisure visits and spending) are at their highest level since before the pandemic, inflation also peaked at 3%, the highest level since 2011.
In the UK, equity markets ended August on a high, as the country continues to recover strongly with further freedoms given to the population. Inflation also dropped unexpectedly, to the Bank of England’s target of 2% p.a. but forecasts suggest that it will peak at 4% p.a. before dropping again by year end. Supply chain disruption (which is having an impact globally) and staff shortages could cause a slowdown and put businesses under pressure leading to an uneven ongoing recovery.
Asian equity markets grow, but Evergrande woes could spark a chain reaction
Likewise, Asian equity markets grew in August set against the context of a global economic recovery as well as encouraging earnings reports. While outbreaks of the Delta variant and the return of lockdowns in China did impact markets (and supply chains for businesses), Japan and Taiwan showed encouraging signs of improvement.
Chinese equity markets have recently remained flat and underperformed the broader region after the country imposed new lockdown restrictions to tackle the worst wave of COVID-19 cases since the first outbreak in March 2020.
Markets were also impacted by a shift in focus of Chinese regulatory authorities as more sectors, such as medical cosmetics, chips and online gaming came under close scrutiny. China’s manufacturing sector shrunk for the first time since April 2020, with the Caixin manufacturing Purchasing Manager’s Index (PMI), coming in lower than expected.
China is changing its stated economic focus towards being more egalitarian and more environmentally conscious with its economic development. The motivation for the changes appear in part designed to present China in the best light internationally for the Beijing Winter Olympics in February 2022 as well as appeal to its domestic population ahead of the key Peoples’ Congress Meeting a few months later (in short, present well for President Xi Jinping).
What is clear is that China is clamping down on two big commodity-using sectors of its economy: property development and steel production. The clamp down has placed China’s biggest property developer, Evergrande, in financial difficulty that could set off a domino collapse of related Chinese lenders. However, while Chinese policymakers may let a property developer fail it is expected they will step in to avoid a broader banking crisis emerging (the central bank has already provided additional market liquidity in that regard) and the focus will be on helping individual property buyers not investors.
Rebound continuing, but recoveries beginning to slow
Overall, the global rebound from 2020 is continuing despite several countries that were first to “re-open” now seeing the rates of their recoveries start to slow. The COVID-19 Delta variant continues to pose a risk to the global outlook, but for developed economies, this is more likely to be in the form of supply constraints than further lockdowns once vaccination levels are sufficiently high.
Clearly the pathway forward remains highly uncertain, but the base case is for a (slower) continuation of economic growth with potentially higher rates and inflation as a result but at a level that keeps the recovery still on track.
For markets, August’s data suggests that the easiest part of the global ‘reopening trade’ is likely now behind us, so while we still see room for further upside in risk assets, there is a need to be selective with individual asset positions as part of a portfolio structure that is designed to ‘live with COVID’ into the future.