23 Jul 2021
Quarter in Review & Outlook
Written by Chris Lioutas - PSK's Chief Investment Officer
A stellar quarter for markets especially with the backdrop of rising inflation concerns, particularly in the USA, and rising virus cases as the pace of reopening powered ahead in some countries and faltered in others. Investor sentiment was boosted by central banks strongly reiterating their commitment to continue providing plenty of support whilst governments around the world maintain their emergency fiscal policy settings.
The quarter started off with bang as 1st quarter company reporting season proved to be very fruitful with earnings continuing to roll off the poor numbers from last year and an extraordinary amount of fiscal stimulus in the hands of households and businesses resulting in a positive spending/investment shock. Most corporates provided healthy guidance for the quarters ahead, but the recurring them was clear inflationary pressures and concerns around labour shortages and material / commodity costs.
Economic data showed signs of continued improvement early in the quarter as the positive momentum of reopening gathered pace. This along with some very large US inflation prints resulted in market participants questioning central bank commitment to continue with the current pace of stimulus and their commitment to look through higher inflation readings in the short term, with many bringing forward their expectations of when central banks, and the US Federal Reserve in particular, would begin to taper (reduce) their pace of stimulus. This affected returns in May but mostly so in the US with the technology sector particularly hard hit, which cascaded into technology and other high valuation sectors getting hit. In contrast, markets with less technology and growth-related exposure fared well, particularly Australia and Europe, where financials, materials, and industrials make up a larger share of their markets.
Poor jobs data in the US, given the overly generous amounts the federal government is paying people to effectively stay at home through to September, along with rising virus cases and central bank reaffirmation of their commitment to be slow, measured, and well telegraphed in any changes to their policy, resulted in a collapse in government bond yields (ie. bond prices higher) which helped boost asset prices across the spectrum, particularly so for technology and other growth-related stocks which had been hard hit in May.
The US dollar also rose strongly at the back end of the quarter as investors sought refuge in the best performing developed economy, with foreign investors rotating strongly into US bonds and equities. This currency move put strong down pressure on the Aussie dollar, falling to levels not seen since November 2020
We, along with most investors and economists, will be acutely focused on the pace of reopening (and hence virus/vaccine data and government policy reactions), the inflation versus deflation debate, and any potential central bank policy missteps, as these will dictate market movements in the short term. At this stage, we believe that the overall pace of reopening will continue to improve, that the inflation / deflation debate will settle in favour of the latter, and that any central bank policy missteps are unlikely to perturb markets given they’re likely to err on the side of caution and go too slow rather than too hard in terms of removing stimulus.
That paints a positive picture for most asset classes in the period ahead. Unfortunately, whilst the outcome is likely to be positive over the medium term, it’s likely the journey won’t be given there’s still plenty of things to work through over the coming few years. Important in the period ahead will be diversification, both across and within asset classes, a selective approach to assets held rather than broad exposure, and time in the market rather than trying to time your entry to and exit from markets.
If you’d like to discuss any of the points raised, please do not hesitate to contact PSK Financial Services on 9324 8888.
This information is provided by AMP Life Limited ABN 84 079 300 379 (AMP Life).
PSK Financial Services Group Pty Ltd (ABN 24 134 987 205) are Authorised Representatives of Charter Financial Planning Ltd (AFSL 234666), Australian Financial services Licensee and Australian Credit Licensee. Information contained in this article is general in nature. It does not take into account your objectives, needs or financial situation. You need to consider your financial situation before making any decisions based on this information.