Below is a high level summary of our current thoughts on the economy, interest rates, investment themes and markets.
Most all major capital cities and territories have, to date, managed their way through the coronavirus issue with limited shutdowns to the real economy, balancing the health, lifestyle and business related aspects well – mitigating shutdowns is key to maintaining business and investment confidence. The one exception is of course the state of Victoria which again entered lockdown this month. Undoubtedly, the economic recovery will be slower in Victoria than most other States for the simple reason that business and investment confidence has been shaken by the relatively heavy handed approach the Victorian Government has taken in tackling limited case numbers versus other States.
- Sydney has further strengthened its position as the unrivalled financial and economic capital of Australasia. It is well placed to compete for business, investment capital and professional talent within the broader Asia region (going head to head with Singapore, Hong Kong and Shanghai).
- Residential Property has entered a new cyclical upswing which will see prices appreciate up to 20% from current levels – Leading Australian fixed income manager and financial commentator Christopher Joye (AFR) was the earliest adopter of the (contrarian) view that Australian house prices would fall no more than 5% from the 2017 highs to recent lows and would then strengthen up to 20% from here. We share this view not only on the fact that Chris is the most credentialed economic forecaster in this country, but the fact that RBA Governor Dr. Philip Lowe recently reaffirmed the Australian Central Bank will keep monetary policy accommodative through to at least 2024 via ultra low cash rates and quantitative easing measures (government bond buying and other unconventional policy tools).
GLOBALLY IT IS TIME TO FOCUS ON THE CURVE
Accommodative monetary and fiscal policy has supported world economic growth through the Covid induced shutdowns in the real economy. The big picture now points to a recovery in ‘real’ growth and inflation.
The US Treasury Yield Curve has steepened
- Longer dated bond yields have moved higher in recent weeks
- Real (inflation adjusted) yields have not
Growth, Inflation and Value
The move in yield curves imply the following:
- Subdued global growth expectations
- Higher inflation expectations
- A better outlook for value and financial stocks
WHAT WE EXPECT (and how we are positioning portfolios)
- The inflation adjusted yield on bonds will move higher
- This will then reflect expectations for a stronger recovery
- and this will signal tailwinds for global equities and commodities and headwinds for sovereign bonds
- The Australian dollar may strengthen further with an improving commodities cycle
Themes to watch for;
- International capital continues to concentrate in the superpowers of the United States and China
- Large scale money printing and low interest rates will eventually result in a return of inflation as confidence picks up – this will be positive for commodities
- The world remains a fragile place from a geopolitical perspective – The US/Europe and China/Russia are likely to maintain a frosty relationship with climate and defence issues possible trigger points
- China will take the baton of global economic leadership on a 7-10 year horizon
Our favoured markets include;
- US equities
- Asian equities – Korea, Singapore, Hong Kong, China (mainland), Japan
- Commodities – iron ore, gold, copper, nickel, cobalt, silver, rare earths, agricultural commodities
Key Market Moves (to 15 February 2021)
Samuel Adams and Glen Orbell