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Market Update 2021

Market Review

June 2021

June provided a strong end to the financial year, with gains in US shares and a weaker Australian dollar resulting in international shares returning 4.7% for the month and 27.5% for the 2020/2021 financial year. The positive sentiment in offshore markets carried over to the Australian share market which finished up 2.3% for the month and 27.8% for the financial year. Global property markets also performed very strongly over the year, returning 24.5% in Australian dollars. Fixed income markets had a positive return for the month, but the one year return was slightly down at -0.8% as markets began to anticipate interest rate rises in the coming years. Considering the landscape a year ago in the early stages of the pandemic, investment markets have been exceptionally strong and superannuation returns have more than recovered their losses from March 2020.

Asset class performance as of 30 June 20211

Asset class 1 month
(%)
3 months
(%)
1 year
(%)
5 year
(% p.a.)
10 year
(% p.a.)
Australian shares
(S&P/ASX 200 Accumulation Index)
2.3% 8.3% 27.8% 11.1% 9.2%
International shares
(MSCI World ex-Australia - unhedged in $A)
4.7% 9.3% 27.5% 14.7% 14.8%
Global Property
(FTSE EPRA/NAREIT Developed Rental Index unhedged in $A)
4.2% 11.8% 24.5% 5.5% 11.7%
Fixed income
(Bloomberg AusBond Composite Index)
0.7% 1.5% -0.8% 3.2% 4.9%
Cash
(Bloomberg AusBond Bank Bill Index)
0.00% 0.01% 0.06% 1.29% 2.19%

 

Employment numbers rise while eyes remain on interest rates

US manufacturing activity supported markets over the month, as did expectations for further improvements in the US labour market. This led to the US share market outperforming other regions with tech shares leading the market gains. European and UK markets were also strong, all of which provided for a very positive end to the financial year.

In terms of interest rates, the US Federal Reserve’s (the Fed) latest ‘dot plot’ suggested that the first rate increase from the Central Bank will be sooner than previously expected, possibly in 2023 rather than 2024, although it will depend on the unemployment rate going forward. Investors have become increasingly anxious about potential rate hikes, but the Fed has stated that they won’t be increasing interest rates until employment has improved and inflation has increased substantially. This helped calm markets and provide the backdrop for solid returns in June.

Given the strong lead from the US share market, the Australian market also produced very strong returns and importantly these gains were spread across all industries. Some further positive news on the global rollout of vaccines also provided a boost to markets. Australian unemployment dropped to a new post-pandemic low of 5.1%, and employment rose by more than 115,000, the strongest monthly result seen since the fourth quarter of last year. Nonetheless, our relatively slow vaccine rollout has caused concerns, which arguably increases the likelihood of snap lockdowns such as that in Melbourne at the end of May/beginning of June and the Sydney lockdown which is into its third week at the time of writing. While the relatively short duration of these lockdowns should minimise the damage to the economy (compared to lockdowns of longer durations), it again brings into focus the importance of vaccines.

Covid-19’s impact on Australia’s migration

Migration has of course been affected by the pandemic, with a net negative figure first being recorded in the June quarter of 2020 carrying through for the remainder of the year. This has had a major effect on Australia’s population growth rate, which has reduced from 1.5% per annum to around 0.5% (see chart below). It’s unclear whether this decline has further to go, but it certainly seems likely that the longer travel restrictions are in place, the more Australia’s economic growth will be disrupted. The economy has performed remarkably well given the effect of abrupt and persistent travel restrictions, but the return of migration to Australia is needed if economic momentum is to be maintained.

Australian Population Annual Growth

Summary

Overall, the 2020/21 financial year has provided investors with very strong returns, far better than what was anticipated a year ago. This has been pleasing and again highlights the importance of not panicking when markets fall and sticking to your long-term investment strategy. 

While share markets over the coming year will no doubt see ups and downs, we expect the Australian economy to remain strong. As the vaccine is slowly rolled out across the population confidence will resume in both consumers and businesses, which should also help investment markets. We expect the Reserve Bank of Australia to keep interest rates at their current very low level of 0.1% for the remainder of 2021 and into 2022, highlighting the importance of diversifying your assets and acknowledging that some risk is required to provide an adequate return.  When compared to cash and bond markets, shares remain attractive given the expected pick up in the Australian economy over 2021/22. We look forward to updating you again next month.

 


1 Bloomberg Finance L.P.
2 Bloomberg Finance L.P., EISS Super