Investment and Economic Update - September 2021
Hindsight is a beautiful thing, but so is foresight. This quarter has seen the majority of the Australian population under lockdown as we strive towards our vaccination targets. With much of the developed world turning away from enforcing widespread lockdowns going forward, the challenge will be balancing the health of the economy with the health of the population. It looks like Australia may avoid a technical recession this year, but the effects of ongoing lockdowns are being felt nationwide. Underemployment remains high, budget deficits continue to grow and uncertainty around what the future will look like continues to plague people’s minds.
18 months into the pandemic, it appears that COVID has economically impacted Western countries more than the larger economies in the developing world, in particular China. Many Western nations have focused more on internal issues as the added cost burden on health and social welfare systems presents short term challenges. The long term impacts of COVID are still uncertain, and when combined with the fact that few countries have been able to successfully subdue the latest strains of the virus, has left many in a state of limbo between reopening and retaining restrictions. China, on the other hand, has been successful in quashing outbreaks thanks to a much tougher stance on restrictions. Moreover, the global growth of demand for discretionary consumer goods has benefited China, as they are involved in the production of the majority of these goods. This has allowed their economy to recover quickly and effectively increase their stake in the global economy – the graphs below show how China’s GDP has grown well beyond its pre-COVID levels, whereas the US has seen slower (albeit still strong) recovery. China is projecting their increasingly dominant position onto other countries, with their recent slowdown in steel production impacting iron ore prices to the detriment of Australia.
With all this being said, however, markets appeared to be looking through what they believe to be short-term noise and are pricing in swift recoveries as restrictions are lifted. Although the RBA had started to wind back its bond buying stimulus, this has now slowed down, given the uncertainty in NSW and Victoria. Importantly, the RBA has not extended their yield curve control program to keep 3-year rates at 0.1%; they have shifted into the April 2024 bond without rolling. With the RBA quashing rate rise concerns in their recent speech, markets do not appear to be pricing in the RBA raising rates in the next two years (the 2 year bond yield fell slightly on the RBA announcement). Given how exposed many investors are to interest rates at the moment, one would expect any rate increases to be very gradual and predictable. With all this, the Australian and many global stock markets have been moving sideways over the past few months, sitting around all-time highs. Overall, investors remain positive on the outlook but cautious on the path to normality.