Investment update for January 2021
Stimulus continues to combat global COVID-19 economic impacts
Equity markets began strongly in January, but those returns had dissipated by month end. Developed markets were a small negative for the month and Australian equities provided a small positive return. Driven by strong returns in China, emerging markets produced a positive return. China’s latest GDP data revealed that its economy grew over 2020 and it is likely to be the only major economy to have achieved that last year.
While the increasing spread of COVID-19 cases and restrictions in response has affected other economies, Chinese industrial production and exports have rebounded strongly. Although Chinese authorities continue to provide stimulus to the economy, the most recent infrastructure investment and credit growth figures suggest that the support is starting to fade.
Macroeconomic data out of the US has been mixed. COVID-19 continues to negatively impact the labour market but economic activity is expanding. Following a volatile process, the transition of power to new US President Joe Biden on 20 January should provide a more stable political outlook. Biden outlined an additional rescue package that approached 10% of GDP. If the full package is implemented, the total US fiscal support for COVID-19 will be about 25% of GDP (approximately three times the size of the fiscal support during the GFC). The US Federal Reserve recommitted to its hold on monetary policy until inflation moderately exceeds its target for a period and full employment is reached.
Stricter lockdown measures in Europe and the UK negatively impacted sentiment and economic output is contracting again. In addition, material trade disruption accompanied the close of the Brexit transition period on 31 December 2020, and the beginning of operations under the new agreement.
Domestically, the Reserve Bank of Australia (RBA) maintained that the cash rate will not rise for at least three years and announced further quantitative easing (increasing the size of asset purchases of government bonds by $100 billion) to support the recovery of the Australian economy. Given subdued wage and price pressures, the RBA expects both inflation and wages growth will remain below 2% over the next couple of years. Government fiscal support remains large but is expected to wind back in the year ahead.
The AUD fell against the USD and GBP while showing gains against the EUR and JPY. The iron ore price climbed to a level in January that was near the peak price seen in the commodities boom in 2011. Increased iron ore export value has so far offset declining exports in other sectors suffering from Chinese tariffs.
Government bond yields rose over the month on expectations of continued economic rebound as vaccine programs are rolled out. Bond indices therefore produced small negative returns and this likely flowed through to negative returns in listed real assets for the month.
Please view our full investment commentary brought to you by our advisers – Frontier – for a more in depth analysis of market conditions this month.
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