June 2021 Market Update

Welcome to the June market update.

Global share markets continue to move higher, leading up to May. And in fact, in the US, the S&P 500 reached a record level on the back of optimism around the opening of the economy. This was spurred by a very successful vaccine rollout, also combined with fiscal stimulus that was announced prior in the year for the Biden administration, and the talk of a further $7 trillion in infrastructure spend to come in successive years, yet to be passed, but certainly provided an additional optimistic mood to investors in the US. All of this, of course, is combined with easy monetary conditions which have been confirmed by the Fed to last for at least another 18 months. Put this together, and you’ve got a record high in the S&P 500. You also saw it in the Russell indexes. So it’s a broad based recovery in US markets.

Despite the buoyant investor mood, May actually saw mixed economic results. In the US, employment numbers missed estimates and inflation actually surprised on the upside, which is a bad combination from an economic perspective. Mind you, when we look deeper behind the numbers, maybe it’s not so concerning. The strong recovery in hospitality in the opening of the economy has led to a couple of issues within the labour market. First of all there are supply issues in the professional sector. So our lack of professionals entering those industries has put pressure in those employment numbers and of course this has also flown into services sectors as well. Given the low female participation rate in the employment market on the back of schools remaining closed and homeschooling remaining very popular. Combine this with the stimulus projection and checks that have been rolled out to the economy, and what you’ll find is a tighter labour market and low participation which has flowed into the number. This is likely to moderating coming months as those types of stimulus programmes roll off. In terms of the inflation number, this has directly been impacted by a demand effect pushed on by fiscal stimulus checks sent out by the Biden administration, which has directly flowed into consumer confidence and consumer numbers. It’s also been spurred on again by labour shortages, which are pushed into the supply lines, supply chain issues through transport, lack of components, which is also meaning that existing supply is limited and therefore flowing into short term price hikes. And of course, we don’t have international trade at the moment, which means that the supply of product is also limited.

Both the lack of supply or participation in labour markets and the break in supply chains is likely to be transitory. The Fed is looking through this. We see in the short term that supply chains will improve as global trade opens up. We also see schools opening up over coming months, which means that participation for females will start to increase and the fiscal programmes that are limiting participation by part time workers, because they can live on the cheques from the stimulus rather than look for lower paid work, is likely to dissipate leading up to September this year, when those programmes roll off. In that regard, labour participation rates are likely to feed into the supply lines. And this will also mean stronger employment numbers. At the same time, that will mean moderating inflation and this is why the Fed believes that inflation will be transitory, a transitory spike in the short term and then moderating out over the next 12 months.

Despite the short term mixed economic results, the outlook for the US economy remains strong on a 12 month basis. We’ve got a combination of the economy returning to normalcy. We’ve got schools opening up and we’ve still got the commitment by the Federal Reserve to easy money and low interest rates. This is good for consumers. It’s good for home borrowers and it’s good for corporate investment. This is also going to be combined with the pent up savings demand from consumers who’ve saved considerable cash balances somewhere circa 2 trillion over the COVID lockdown. This is yet to be deployed, and as people return to employment and confidence continues to increase, we’re likely to see that move into the broader economy through increased expenditure. Corporate cash balances remain very positive, which is good for investment, and of course paying dividends in months to come. Put this all together and we can see as the global economy opens up in particular with Europe, we’re likely to see a period of strong economic growth over the next 12 to 18 months.

In Australia markets also made new highs. We saw this across all sectors. The material sector in particular, where iron ore and base metals have performed strongly on the back of increased demand out of China. We’ve seen the iron ore price in the last 12 months rise from $87 to $207. This has been a boom for national income in Australia and allowed for quite an aggressive and positive budget announcement in May. This is likely to spur on economic growth in Australia over the next 12 to 18 months. We also see an improvement in the banking sector outlook. Debt provisioning that was pushed up quite high in COVID has now been reduced and we’ll likely see that flow into profitability this year. Also, we’re seeing a boom in lending off the back of the property boom. So again, the outlook for banking sector looks very positive. We’re also seeing it in small companies. So it’s a broad based recovery. This is positive, and it looks good for the next 12 to 18 months for share investors.

The RBA released a set of strong numbers in May, GDP being forecast for the year at four and three quarter percent, which is a great result and the RBA actually forecasted a further three and a half percent GDP growth in 2022. This is going to be positive for share market investors, will also be positive for property investments as well. All of this growth is underpinned by strong fiscal expenditures announced in the budget. And of course, the RBA’s commitment to easy monetary policies over the next 12 to 18 months. Inflation is now near the RBA’s target, which is a positive because that means that we see an increased demand. However, employment is dropping faster than expected, which has put some uncertainty around interest rates in the marketplace. It’s now at 5.5%. However, we should be aware that the RBA is reconfirmed its intention to keep rates low into 2024, which provided a cheap line of funding into the banking sector for that period. This is now flowing into the property sector through lower interest rates. The focus on the Fed is not so much the inflation rate, which is comfortable if it stays between two and 3% over the coming months, and in fact years. It focuses on the real wages of employees in the economy and wants to see those real wages picking up because that will flow into consumption which is good for the broader economy. In order for this to happen, and despite the low employment levels at present, the RBA wants to see even tighter unemployment levels. So below 5%. It has no reason to believe this will happen for the next 18 months. So we believe with confidence that the RBA will actually retain rates low for at least into 2024.

This low interest rate environment will be positive for property markets in the near term. Despite the strong run up in recent months, it’s likely the property prices will continue to rise, albeit at a moderated rate over the next 12 months. The low interest rates are likely to feed into strong consumer confidence, stronger employment levels are likely to flow into more competence in the property sector, and we will see that demand coming through. At present, it’s a little bit skewed towards the supply side issue. So there’s not a lot of supply in the marketplace. There’s a lot of pent up demand from lack of buyers in 2021 because of COVID. This is now starting to play out but more supply will come on into the market over the coming months and we’ll start to see some of those price gains moderate. However, in a 12 to 18 month possibly 24 month view, we still think it’s really positive for property markets. The RBA is committed to providing cheap money through till 2024. They’ve provided a substantial line of credit into banks through the term facility in 2021. Given COVID, 154 billion of this has been deployed into the banking sector, there’s still another 74 billion to go. This means that investors will be able to access cheap money for a number of months to come yet. All of this will underpin the property markets next move over the next 12 to 18 months. It’s also very positive for share markets. Overall, the outlook for investors is positive on a 12 to 18 month view in our opinion, albeit we expect some volatility in short share markets in the near term, simply because we’ve had such a strong recovery in global and domestic markets in the last 12 months. So this is the time to digest that move before we start to see markets push up to higher levels.

And that’s the June market update. Thank you.