Spend, Spend, Spend

June 2021 Monthly CiN-sights

A number of global equity indices again posted new all-time highs through May – the Dow Jones and S&P500 in the US, the STOXX600 in Europe and locally the ASX200 finally broke through its previous high of February 2020, to hit a peak close of 7,179.51 as selective commodity prices spiked. The stimulatory policy remains in place globally, with the Australian May Federal Budget containing a raft of new spending measures.

In what some commentators have labelled a “spendathon”, Treasury has announced a number of new initiatives in addition to retaining some that were launched in last year’s budget. Their challenge is to ensure that a broad economic recovery continues and this has been targeted with tax incentives, spending on infrastructure ($15bil) and aged care ($17.7bil), plus personal income tax relief ($7.8bil).

The positive for business and for a number of listed companies is the extension of the instant asset write-off, which has been extended until June 2023 (worth an additional $20.7bil). The government is expecting this to drive a recovery in non-mining investment which has stumbled during the pandemic. The latest April NAB business confidence index, which hit an all-time high level, pointed to continued improvement across all industries. For workers on low to mid incomes there was an extension of tax cuts of between $1,080 to $2,160 (dual income) and a number of changes to superannuation flexibility, including a repeal of the work test for certain voluntary contributions.

The positive for business and for a number of listed companies is the extension of the instant asset write-off, which has been extended until June 2023 (worth an additional $20.7bil). The government is expecting this to drive a recovery in non-mining investment which has stumbled during the pandemic. The latest April NAB business confidence index, which hit an all-time high level, pointed to continued improvement across all industries. For workers on low to mid incomes there was an extension of tax cuts of between $1,080 to $2,160 (dual income) and a number of changes to superannuation flexibility, including a repeal of the work test for certain voluntary contributions.

Treasury expects GDP to recover to above pre-pandemic levels in 1Q21 and forecasts that FY20/21 will achieve 4.25% growth. That is slightly below some economic forecasters, but unemployment estimates are more consistent at circa 5% for FY21 and falling to 4.75% in FY22. Despite government expenditure remaining well above its pre-COVID level the underlying deficit of -$161bil is an improvement on the -$214bil expected last year.

Likewise, internationally governments continue to use fiscal measures to support the recovery. In the US, President Biden has announced an approx. $US1.7tril new infrastructure package (the American Jobs Plan) to create jobs over the next 8 years. Cheques from the latest $1.9tril stimulus program have been despatched and saw a substantial uplift of +10.7% in March retail sales, which were verified in the Q1 earnings beats for the major US retailers. Similarly in AU spending resumed, with consumer sentiment hitting its highest level since 2010 and the latest monthly retail sales data lifting 1.3%. In the UK, the government extended its job furlough scheme by a further six months until the end of September.

The strong economic recovery in the US (and AU) combined with a resurgent consumer have again raised fears of increased inflation. In the latest US April CPI data, both headline and core inflation rose the most month-on-month since 1981 and 1982 respectively. Energy prices, including both gasoline and heating oil, surging commodity prices (lumber +125% and copper +36% in CY21) and used vehicle prices, along with supply bottlenecks (e.g. semiconductors) contributed to a much higher outcome than expected. US equity markets fell heavily on the release day, as investors feared Federal Reserve policymakers may look to increase interest rates, albeit the Fed has steadfastly said inflation needs to average 2% over an extended period to contemplate rate changes.

The ASX200 strength in early May was pressured as the US inflation number rattled markets, despite the latest AU Q1 core CPI being the lowest year-on-year number ever recorded. However, by month end the index had recovered to hit record closing levels. The rotation trade into economically sensitive stocks continued as the miners and banks continued to outperform versus the tech sector. Iron ore and copper prices hit all-time highs, being ~$US240/t and ~$US4.75/lb respectively. The banks interim reporting season was strong, with provision releases (as economy rebounds) and strong capital positions were augmented with better than expected dividend payments.

Our current asset allocation is overweight equities which we remain comfortable with. The latest data on economic activity remains robust, with manufacturing PMI’s, industrial production and consumer spending all supportive for GDP growth and risk assets. We acknowledge COVID-19 issues still persist and remain alert to sustained inflationary pressures.

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