Quarterly Market Update – Q3 2021

September Quarter 2021

Market and Asset Class Views

Australian Equities:

A stellar performance in the June quarter saw the ASX200 rally +7.7% taking the index to a new all-time high close, eclipsing the previous peak set in February 2020. Sentiment remained positive for global equity markets during the quarter, with the ASX200 performing in-line with the S&P500 (+8.2%) and outperforming the Stoxx600 (+5.4%). A continuation of strong economic data, commodity prices, plus accommodative policy provided the impetus.

The May Federal Budget contained a raft of new spending initiatives, plus extended some measures which were announced last year. The government also announced additional fiscal support for workers affected by Covid-19 lockdowns. The latest March quarter GDP revealed +1.8% QoQ growth, which was better than expected and saw a continued uplift in household consumption. The strength in the latter was evident in both consumer confidence, which hit the highest level since 2010 and a 1.1% increase in April retail sales. Strong commodity prices (iron ore, copper hitting new peaks) resulted in substantial surpluses for the latest current account and trade balance data, with the value of AU exports at a 13 month high.

The RBA left interest rates unchanged at 0.1% in their June meeting maintaining their commentary that supportive monetary policy will likely remain, subject to inflation not being sustainably higher (2-3% target range). Similar to a number of analysts they have increased their GDP estimate, with 2021 growth now expected to be 4.75% versus 3.5% (2022 unchanged at 3.5%). However, the consensus is now above 5%, which includes the OECD who in their May Economic Outlook upgraded to a 5.1% outcome. Unemployment expectations are more consistent with most expecting a year-end level of 5%, falling to mid-4% in 2022. The May unemployment release continued the recent downtrend, coming in at 5.1% being the lowest since pre-pandemic.

The AUD has fallen to 0.75 as the USD strengthened on the Federal Reserve’s hawkish pivot. The AUD bull case is still intact courtesy of the accelerating domestic economy and the broader global recovery. We expect it to trade back towards to 0.80 over this quarter.

Heading into the June half reporting season the earnings outlook remains strong. We have seen continued upgrades for EPS growth following on from the very solid December half results and the strength of the domestic recovery. Estimates for FY21 EPS growth now sit around 25%, which is a double-digit increase from expectations at the beginning of this year. The drivers being upgrades to the banking and resources sectors. For FY22, a more conservative circa 10% growth is currently expected with PE valuations around 20x.

The ASX200 has responded to the extremely positive economic recovery, fuelled by the massive fiscal and monetary support combined with a booming housing market. A more rapid Covid-19 vaccine rollout supports this enthusiasm. However, as we have highlighted previously we are mindful of inflationary pressures in the economy, both domestically and across the global supply chain along with surging prices across multiple commodities. Additionally, we continue to monitor possible central bank action on tapering of their expansive QE programmes. 

We stay Overweight but at a reduced level.

US Equities:

Another quarter, another record with all three major US indices hitting new highs. Furthermore, the Russell 2000 small-cap index recorded its ninth straight month of gains, the first time since 1995. The continued reopening of the economy coupled with strong vaccination rates provided the impetus, although into quarter-end the Federal Reserve (Fed) June meeting saw increased volatility courtesy of their hawkish comments on inflation and possible interest rate hikes. 

The exceptionally supportive policy response by the Government and the Fed has been maintained for the time being, with the Biden administration announcing a new circa $1.2tril infrastructure package (the American Jobs Plan) to create jobs over the next 8 years. To date, we have seen in excess of $US5tril spent on COVID-related relief efforts, which has been augmented by the FED‘s bond purchases as it has effectively doubled its balance sheet to $US8tril. The FOMC meeting kept interest rates steady in the 0-0.25% range and retained their existing monthly QE purchases, however, they suggested that rates could now rise as soon as 2023 and lifted their CY21 inflation estimate to 3.4% up from 2.4% (was 1.8% in Q1).

The GDP outlook for CY21 has continued to be revised up with a number of economists, including the Fed, now at 7% YoY growth. For CY22 the consensus is approx. +4%, with the more bullish estimates closer to 5.0% expansion. The strength in the domestic economy has continued to see unemployment fall, with the May release (5.8%) at the lowest level since the start of the pandemic.

The market opinion on the inflation outlook is divided, with a number of commentators including the Fed, suggesting it is transitory as the economy continues to reopen and normalise. This is despite the latest May headline and core CPI releases printing well above market expectations (as they also did in April), at 0.6% and 0.7% MoM respectively. The bears point to a number of recent indicators that suggest the economy is overheating, with surging commodities, energy and food prices, to supply-side bottlenecks (semiconductors, shipping constraints) pushing up the price of finished goods. Interestingly in the most recent labour force data, higher wage costs also indicated inflationary pressure with average monthly earnings surging 0.5%. 

The latest Q1 results season for the S&P500 recorded +52% earnings growth, which was the strongest year-over-year performance since Q1 2010. This impressive result was effectively double what analysts expected in January. Expectations for Q2 and CY21 earnings remain bullish, being +61% and +35% respectively. Equity strategists continue to expect further upside for the index, with a year-end target of around 4,600.

Despite likely increased volatility we still favour an Overweight position, albeit have trimmed back the allocation which had been lifted in our February mid-cycle call.

European Equities:

As European countries slowly started to emerge from the COVID-19 lockdowns during the first four months of the year, a number of equity markets in the region hit record highs. For the June quarter the Stoxx600 rallied +5.4%, the Germany DAX was +3.5% and the French CAC40 was +7.2%, all recording new peaks.   

Despite the market’s enthusiasm for the economic reopening, the data releases across countries were mixed as the phased easing of restrictions still faces challenges complying with acceptable virus control. The overall EU region slipped back into a technical recession in 1Q21 with GDP contracting by -0.3%. Germany’s economy shrank -1.8% in the quarter but avoided a double-dip recession, however, France the second largest economy in the zone fell back into a recession with a -0.1% reduction. Conversely, the UK grew 2.3% in the latest April release. As this growth data is historical, the focus has shifted to recently released indicators of industrial production (IP) and the forward-looking PMI statistics. Euro April IP rose 0.8% and the latest May manufacturing PMI printed at an all-time high, pointing to fresh record growth in factory activity.

These latest readings come amidst an acceleration of vaccine inoculation across continental Europe which had struggled earlier in the year with delays in production and distribution, plus vaccine hesitancy in some countries. The EU expects to have more than a billion doses available by the end of September from four manufacturers and 70% of the adult population to have received at least one dose by July. The UK continues to lead the way, with over 76mil doses administered and 32mil people having received two doses. The rollout is critical for the regions relaxation of lockdown controls, including border reopening and permitted travel as they enter the important summer tourist season. A number of countries still have restrictions on inter-country travel and quarantine requirements, with recent evidence of the new Delta COVID-19 variant in some areas lifting fears of another wave of cases.

The ECB has maintained their supportive policy setting leaving their existing QE programme at €1.85tril, with no commentary on tapering this operation plus saying they expect to conduct purchases at a significantly higher pace over the coming quarter than during the first months of the year. They upgraded their 2021 GDP estimate for the region to +4.6% from the previous 4%, consistent with the latest IMF and OECD forecasts. The UK’s BOE similarly retained their historic low-interest rate of 0.1% and £895bil QE programme, whilst lifting the CY21 GDP estimate to +7.2%.

The corporate earnings recovery during Q1 was outstanding, with the Stoxx600 recording +93% growth YoY. The consensus earnings estimate for CY21 is +40% and a PE multiple of 17.5x, which remains significantly attractive compared to other developed markets, like the US.

We remain Overweight, at a reduced level, given this continued attractive valuation differential and improving economic activity.

Emerging Market Equities:

Emerging market equities underperformed developed markets in the last quarter (6.7% vs. 9.5%), driven by slower economic recovery happening in certain EM regions, like Southeast Asia and Latin America. A recent research paper from JPMorgan stated that EM equities are becoming much more growth-oriented. EM equities offer investors exposure to themes such as the rise of the EM Asia middle class and technological innovation. It is no longer unexpected for EM to underperform during cyclical rallies when growth is out of favour.  

Some EM countries have been hit by powerful second waves of the pandemic during the quarter. India and Brazil accounted for half of the new COVID-19 infections in the world in May. We have seen a decline in new cases in India in June and things have started appearing normal after weeks of tragedy. Vaccinations have started in most emerging markets, but the pace of rollouts varies considerably across countries. So far, Brazil has fully vaccinated 12% of its population, whereas fewer than 4% population in India have received the two doses in full. Supply being a key challenge. For most EM countries, vaccination remains a story for the second half of this year and into 2022.

China’s GDP grew at a record pace in Q1 (18.3%). Although the reading has a low comparison base in 2020, the strong growth reflects China’s strengthening domestic and global demand, robust economic performance and continued fiscal and monetary support. The unemployment rate is the lowest in two years. Positive change has also been seen in China-US tensions as the US is adopting a softer tone with China.

Semiconductor and car manufacturing helped drive a 46% increase in South Korea’s May exports year on year, the fastest growth since 1988. As with China, this leaves their central banks with the task of avoiding overheating amid economic stimulus. Over the last three months, we have seen rises in inflation across EM countries, which may trigger a tightening of interest rates later this year. Brazil has already lifted interest rates, despite weak economic conditions. As the US Fed is moving more rapidly towards policy normalisation than some other central banks, we expect to see a stronger US dollar. This adds to EM countries’ cost of paying their foreign-currency debt.

Commodities overall are entering a period of demand as new infrastructure projects get underway, but the impact is a mixed story for EM countries. For instance, higher oil prices benefit exporters such as Russia and Latin America, while it becomes a burden for importers like India.

With vaccinations picking up and a stronger rebound in global growth, we expect some rising momentum in EM equities. However, we are cautious that large divergences in EM are present, therefore move to a Neutral stance.


A-REITs returned +8.9% over the past quarter and +28.5% over the past 12 months, outperforming the broader ASX200 by 1.2% and 4.5% respectively.

The recent RBA meeting noted the continuing strength of the residential housing market, evidenced by the strong demand from owner-occupiers plus continued growth in housing credit data. The office sector outlook remains muted, with CBRE forecasting further weakening in net effective rents (1Q21 at $404psm, -12.9% YoY. 4Q21 estimate at $391psm), accompanied by increasing incentives (36.9% in 1Q21, +10.8% YoY). The industrial sector (particularly e-commerce logistics) is benefitting from the continued increase of online retail sales. This has doubled since 2015, now representing 13% of total retail sales and is expected to reach 20% penetration by 2025. Valuations for office and retail assets appear attractive in comparison to equities, while industrial asset values remain steady and in line with rental escalations and lease extensions.

We retain our Neutral view on this asset class, believing that A-REITs will continue to provide attractive yields into FY22 as dividends rebound, despite the consensus flat distribution expectation in the current FY21.


A return to normality is likely to support Private Equity markets, as opportunities emerge in re-opening economies with the prospect of buying distressed assets courtesy of Covid-19. The same broad economic and market fundamentals that have driven equity markets to all-time highs, also remain a tailwind for private equity assets.

A stronger investor risk appetite coupled with increased leverage and cheap debt is providing further support for deal activities. With volatility entering equity markets and bond markets seeking equilibrium amidst the recent inflationary pressures, we see private equity markets as a suitable alternative and increase our Overweight position.


Over the quarter we have seen a strong move in Gold from 1700 up to a high of 1919, representing a 12% increase. Gold encountered a sharp correction of 8% at the end of the quarter, as the Federal Reserve took a more hawkish approach at its recent FOMC meeting, albeit it did rebound from this low.

A correlation of 0.73 between the year-over-year growth of the Bloomberg Commodities Index and the U.S. Consumer Price Index presents evidence that gold serves well as an inflation hedge. Combined with its negative correlation to equity markets, we see gold playing a dual role in the portfolio as an inflation hedge and/or defensive anchor. However we are cautious that the strengthening USD can hinder gold’s near-term performance, therefore we remain Neutral on our allocation to gold.

Hedge Funds

Hedge Funds offer an opportunity to access the relatively neutral correlation between both equity and bond markets.

Our preferred style within the hedge fund universe is Global Macro, whereby managers can operate within a broader investment universe (outside of purely listed equities) and can apply sub-strategies and counter-strategies that look to generate returns in times of volatility and adjusting cycles. We look to take advantage of a more market-neutral position and increase our recommended position to Overweight.


Infrastructure’s role in a portfolio has historically been a diversifier and a natural inflation hedge with lower volatility and higher income characteristics compared with equities.

As the global economic recovery continues to gain momentum with economies re-opening, we hold the view that in the medium to long-term, the fundamental value and outlook for infrastructure assets remains positive. Infrastructure assets held in the regulated and user-pay areas where inflation is directly or indirectly linked and passed through to customers will also benefit.

However given the long duration nature of these assets, when the market experience rapidly rising interest rates, we could see these assets underperform in the short term. Therefore, we remain Neutral on Infrastructure for the coming quarter.

Fixed Income:

We started the last quarter with the most negative call we have had in the fixed interest class since starting this publication – both in duration and credit terms. For the first part of the quarter, this was tremendously successful, especially as long-duration assets (both bonds and growth equities) were heavily sold off and the funds raised on the underweight FI call were successfully deployed to equities. The latter part of the quarter saw duration assets rally and being underweight led to some “hurt” within the asset class, however more broadly we were more than compensated by equity market returns.

Thematically, we now morph from the Great Reflation to the Great Transition. The question is “The Transition to What” and over what Time Frame? If the Bond market is the best arbiter on inflation and economic growth, then the recent rally in yields points to the recent Inflationary impulse as temporary and that economic chokepoints will ease by year-end.

Looking ahead to the following quarter, we now reduce our underweight allocation to FI. With the US and Australian 10-year yields at 1.51 and 1.59 respectively, we are still tracking well below the inflation rate in both countries and expect the balance of pressures to be upwards. We see the small underweight call as a function of partly funding the continued momentum trade in Equities and we see Credit markets closer to fair value.

For further information and guidance, please contact us here.

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