April’s Double Dose: Continuing Stimulus & Encouraging Corporate Earnings
May 2021 Monthly CiN-sights
Another good month for the goldilocks markets with risk markets generating solid returns. The ASX 200 returned 3.5%, S&P 500 rose by 5.3% and the broader global MSCI World market also putting on 4.5%. Equity markets have been supported by 2 core themes,
1) That the Fed Reserve and other Central Bankers remain supportive of stimulatory conditions and want real growth pulses – Powell’s recent communications to the market have provided that; and
2) Economic data and corporate earnings are providing hard evidence of the V-shaped recovery.
To this end, we saw US GDP rise 6.4% over the quarter with GDP back at near pre-pandemic levels with Employment numbers a little softer than expected. First-quarter corporate earnings in the US have recorded strong positive EPS surprise for the S&P 500, with earnings to date plus 45.8%.
We see Biden’s “Infrastructure” package as also supportive but have low expectations of anything concrete being agreed in the short term. Global synchronisation looks to have also supported the European region, with Economic Sentiment Indicator surged to 110.3 ahead of expectations of 102.2 and the Stoxx600 index rose 1.8%. Importantly for Australia, the Chinese economic story remains intact with Chinese PMIs driving key commodity prices higher. The hunger for Australian red dirt continues.
Potential dark clouds still sit on the horizon. We can see them, but mostly they are far enough away. India’s coronavirus story is concerning, but we believe that whilst a humanitarian disaster, it will have little impact on global economic factors.
Bond rates have now settled at levels that can be accommodated by equity markets. US Bonds are now attractive at 1.65% for Japanese investors to swap back into Yen for positive returns and that has seen real end demand.
The potential shock/threat is still inflation with the debate around what price pressures are transitory and what is a step-change break to the disinflation story.
We are seeing price rises in key areas driven by freight logistical frictions. Until we get clear data on trends this remains a “watch and wait”.
We remain comfortable with our current asset allocation tilts, firmly to growth assets and being funded by underweight the Fixed Interest class.
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