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Economic update with Jeff Brunton

The financial market bounce-back
accelerated during recent months.

Positive vaccine news during November was a strong catalyst to drive equity markets higher and despite surging virus numbers internationally this momentum carried into the other major recent event which was the US election. The Biden win and the early January confirmation of a ‘Blue Wave’ (control of both Houses albeit a slight majority in the Senate) means that the market has dramatically adjusted for more fiscal stimulus and a much stronger growth outcome for 2021. Figure 1 shows Deutsche Bank’s revised outlook for the US which shows activity reclaiming the pre-COVID level in H1 2021 and then back on the pre-COVID growth path by the end of 2021.

Figure 1: Forecasters significantly uplifting US Growth Outlook

Graph1

 

Source: Deutsche Bank

This trajectory has seen equity markets push higher and credit market spreads narrow significantly. Essentially the market is reassessing the speed of the pandemic recovery to be much faster as the rollout of the vaccine coupled with ongoing huge amounts of fiscal and monetary stimulus are providing a much faster comeback. Figure 2 compares the time in quarters taken to reverse the lost employment from prior recessions and the red line which is Deutsche Bank’s forecast for the current COVID recovery is much faster.

Figure 2: Time to Recovery Lost Employment in Typical Recoveries

Graph2

 

Source: Deutsche Bank

This reassessment of a much faster recovery we believe is a fair assessment by the markets. Valuations appear stretched in many asset classes, but the stimulus should be the dominant effect as we move further into 2021. Bond markets have begun to react, but central banks here in Australia and New Zealand as well as overseas have been quick to remind everyone that they will be very slow to raise interest rates and that this begins a few years from today. So all in all, any rise in bond yields should be pretty modest, this will allow equities to continue to perform.
 

Market returns for the last quarter of 2020 were generally positive for growth assets, while rising bond yields meant fixed income returns were lower.

Table 1: Market Returns 31 December (in AUD) 3 Mths (%) 1Yr (%) 3Yrs (%pa) 5Yrs (%pa)
Equities          
Int’l Equities (Unhedged) MSCI World (ex-Aust) Accum. Index (AUD) 5.68 5.73 11.15 10.93
Int’l Equities ex Tobacco (Unhedged) MSCI World (ex-Aust, ex-Tobacco) Accum. Index (AUD) 5.71 5.89 11.37 11.08
Int’l Equities (AUD hedged) MSCI World (ex-Aust) Accum. Index (AUD hedged) 11.73 10.57 9.01 11.39
Emerging Markets Eq. (Unhedged) MSCI Emerging Markets Accum. Index (AUD) 11.18 7.77 6.65 11.48
Australian Equities S&P ASX 200 Accumulation Index 13.70 1.40 6.72 8.72
NZ Equities NZX 50 Gross Index (in NZD) 11.44 13.92 15.93 15.65
Real Assets          
Direct Property Mercer/IPD Australian Pooled Property Fund Index 2.43 -2.07 4.67 7.77
Global Listed Infra. (AUD Hedged) Dow Jones Brookfield Global Infra. Net Acc. Index (AUD Hedged) 4.73 -10.68 2.74 7.03
Global REITs (AUD Hedged) FTSE EPRA/NAREIT Developed Rental Net Index (AUD Hedged) 10.59 -13.49 0.47 2.84
Australian REITs S&P ASX 200 A-REIT Accumulation 13.30 -4.61 5.42 6.98
Fixed Income          
Int’l Fixed Income (AUD Hedged) Barclays Global Aggregate Index (AUD Hedged) 0.79 5.09 4.61 4.55
Australian Fixed Income Bloomberg AusBond Composite Bond Index 0+YR -0.10 4.48 5.41 4.55
NZ Fixed Income Bloomberg NZBond Composite Bond Index 0+YR -2.18 4.80 4.68 4.62
Cash & Currencies          
Australian Cash Bloomberg AusBond Bank Bill Index 0.02 0.37 1.26 1.52
Australian dollar AUD/USD 7.66 9.77 -0.45 1.18
New Zealand dollar NZD/USD (in NZD) 8.93 6.72 0.41 1.01

 

Source: AMP Capital

Overall, the outlook for the global economy has shifted higher – we align with the faster recovery expectations now driving markets higher on the back of unprecedented stimulus. Financial markets have adjusted, but growth assets are likely to deliver significantly better returns than defense assets in 2021.

We continue to have significant protection strategies in place should equity markets fall again due to a major change in this positive outlook, and we continue to have protection strategies in place should interest rates either rise or fall significantly.

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