Who Blinks First?

August 2021 Monthly CiN-sights

The global equity market rally rolled on in July, with all three major US indices hitting new all-time highs as did the Euro Stoxx600 and the ASX200. Optimism on the global economic recovery coupled with bullish expectations for the Q2 reporting season in the northern hemisphere providing the impetus. However, sentiment waned mid-month on economic growth concerns courtesy of the spread of the highly transmissible Covid-19 delta variant and inflationary pressures, with a defensive stance pushing bond yields back to lows not seen since early 2021.

Central banks have maintained the view that the recent spike in inflation numbers is transitory as economies normalise from the disruptions in 2020. However, the data continues to negatively surprise with the last three months of US releases being higher than expected and lifting the inflation rate back to levels last seen in 2008. This has raised anxiety on the likely tapering of stimulus, plus the timing on possible interest rate hikes.

The Federal Reserve has over the last few months moderated its dialogue on the likely timing of rate adjustments to 2023 from 2024. The strength of the US economic recovery (GDP +6.4% in Q1 and a preliminary +6.5% in Q2) has increased the expectation of future policy tightening and resulted in USD strength.

In Australia, the RBA has kept interest rates at historic lows and whilst tapering some of their QE programmes, have indicated that rates will remain accommodative until 2024. The market awaits their August update post the 2Q21 headline CPI printing at the highest annual level since 2008. The AUD has been adversely impacted by expectations on the timing of global monetary policy changes, combined with heightened concerns on the domestic growth outlook from the impact of current national Covid-19 lockdowns (some economists now expect a negative Q3 GDP number). This is despite the latest June unemployment rate of 4.9% falling to its lowest level since mid-2011.

An additional negative for the currency is commodity prices, which have started to plateau from their recent peaks as China imposes tighter restrictions on both production levels (particularly crude steel) and speculative domestic trading in an attempt to curb prices, whilst suggesting they will release metals from their strategic stockpiles.

Corporate reporting season commences across multiple jurisdictions with bullish earnings expectations. Here in AU, the anticipated June half results have continued to see positive analyst revisions, with FY21 EPS estimates now at circa +30.0%, the banking and resources sectors leading the enthusiasm. In the US, Q2 earnings estimates for the S&P500 sit at +70% YoY, which would be the highest quarterly growth rate since 4Q2009. For CY21 the consensus growth is now +37%. Likewise in Europe Q2 estimates have continued to ratchet higher, with Q2 at +140% YoY (albeit off a low PCP base) and FY21 at circa 50% growth (was +40% two months ago).

Domestically, we continue to witness the positive trend of growth in investable funds at both a retail and institutional level. This is being supported by ongoing M&A activity, whether completed transactions like CCL, BIN or current bids: API, BLD, CWN, SKI, SYD and OSH. In addition, ANZ and NAB have announced on-market share buybacks of $1.5bil and $2.5bil respectively. Analysts expect the other major banks are likely to follow given the high levels of surplus capital they are holding. At an institutional level the increase in the Superannuation Guarantee levy on 1st July by 0.5% to 10% with further increases to 12% by July 2025, will underpin the growth in the super assets over the next 5 years.

The total value of superannuation assets under management

Note: Includes superannuation balances for defined contribution funds for people over 25 years. Excludes defined benefits, regulatory capital and life office statutory funds. Source: The Commonwealth of Australia, 2021 Intergenerational Report

In our recent September quarter outlook, we trimmed our allocation to risk assets on the expectation of increased volatility courtesy of inflationary pressures and ongoing Covid-19 challenges. We remain comfortable with our current asset allocation tilts, being a slight overweight to both equities and alternatives, which is funded by a mild underweight to the fixed income asset class.

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