Investment update for June 2021
Markets still impacted by the pandemic and political events
The 2021 financial year has witnessed the rollout and distribution of vaccines across major economies. Around a quarter of the world’s population has received at least the first dose of the vaccine, however, emerging economies continue to lag behind in securing supply. As major lockdowns conclude, much of the global economy has rebounded from recessions with China taking the lead. Key economies such as Europe and UK have seen a second economic contraction due to secondary COVID-19 waves. Globally, the manufacturing and goods sector have recovered strongly, albeit some disruptions from lockdowns remain. On the other hand, the services sector’s recovery continue to lag due to social distancing requirements and closed borders.
Over the year apart from COVID-19, there were also other developments with the US Presidential election dominating headlines and Brexit finally implemented after long negotiations at the end of 2020. The US also kicked off 2021 with the Capitol Hill riots protesting the results of the election.
On the government policy front, support has been very large. However, alongside evidence that the recovery is taking hold, there are now signs that the baton is being passed from policymakers to households and businesses. In monetary policy, while central banks remain committed to low rates for an extended period, there has been a noticeable slowdown in the pace of quantitative easing towards the end of the financial year.
Due to its potential impact on monetary policy, inflation has become a key concern for markets as economies re-open. At this stage, the spike in inflation across key countries appears to be driven by base-effects, such as the rise in commodity prices and supply chain constraints.
In the financial markets, global equities achieved new highs over the financial year.
However, the performance of Australian equities was not as strong as developed and emerging market equities despite the relatively better economic and COVID-19 outcomes locally.
US and Australian government bond yields have increased and ended the financial year at around pre-pandemic levels, driven by news of the rollout of vaccines and improving economic growth outlook. This has led to slight negative returns from Australian and global bonds over the year. Credit spreads have contracted materially over the last 12 months leading to positive returns from corporate bonds.
The sharp recovery in global demand, particularly Chinese demand, has driven commodity prices higher over the last 12 months. The standout was the iron ore price which started the financial year a little over $100 USD/tonne but ended above $200. As a result of the higher iron ore price and improved market sentiment, the Australian dollar appreciated over the financial year.
At its June meeting, the Reserve Bank of Australia maintained its 0.1% cash rate target, 3-year bond yield target and government bond purchasing program. Despite the better-than-expected recovery in the domestic economy and jobs market, inflation and wage growth remain subdued. Global and Australian listed property and infrastructure also performed positively in June.
Please view our full investment commentary on YouTube, brought to you by our advisers – Frontier – for a more in depth analysis of market conditions this month.
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