Weekly Market Update – 22 Mar 2021

Dovish policy continues and employment data surprises.

Central bank policy meetings were in abundance last week with the Federal Reserve, Band of England and Bank of Japan all sitting.

But it was very much a case of same story different week.

As we have come to expect, central banks continue to sing from the same hymn sheet declaring interest rates are set to remain at historic lows until inflation and employment are sustainably tracking their desired targets.

No matter how much confidence or direction central banks continue to provide, bond markets continue to slide with yields on 10 Year US Treasury Notes now at 14-month highs of 1.72%.

Bond markets and investors are seemingly calling out this central bank rhetoric which says that economic fundamentals have a long way to go, instead believing that economies are recovering at a faster rate than central banks are willing to admit.

It is somewhat counterintuitive because investors are reducing exposure to bonds and other fixed income assets believing interest rates will eventually rise (2023/2024) at which time these higher yielding products will become more attractive for inclusion in defensive portfolios.

Investing and portfolio management should always be long-term focused. Volatility and market drawdowns are some of the pitfalls investors need to deal with as they seek to grow their asset base.

Despite the selloff in bond markets (the benchmark Bloomberg Ausbond Composite Bond Index is currently down -3% for 2021) we remain fully committed to the fixed income allocations of portfolios given the diversification it provides.  

A -3% drawdown in equity portfolios tends to occur far more quickly than a -3% fall in bond markets.

We continue to navigate this challenging environment by favouring bond funds that have limited duration risk which minimises the negative effect that rising interest rates will have on bond prices.

The Ardea Real Outcome Fund (HOW0098AU/XARO) has returned +4.1% in the past 12 months and remains our preferred exposure in this space.

What did the central banks say?

The Federal Reserve kept rates unchanged but said it was becoming more upbeat about the future of the US economy increasing its expectations for 2021 growth to be around 6.5%.

This is a material upgrade from the Federal Reserve’s previous expectation of around 4.2% with the latest round of government stimulus (US$1.9t) a key driver in the higher revaluation.

Further boosting sentiment, the Fed expect unemployment to fall to 3.5% in 2023 which would take the overall figure back to pre-pandemic and fifty-year lows.

Despite a few more members of the Federal Open Market Committee (FOMC) becoming more hawkish on the future direction of rates, the Federal Reserve maintains that inflation is unlikely to surpass 2% by 2023 which remains below its target.

Essentially this means that current rates and accommodative monetary policy remains in place until either the Federal Reserve’s inflation expectations rise or actual inflation rises.

Current indications suggest this will likely be some time in 2023.

The Bank of England (BoE) likewise kept rates on hold at 0.1% and agreed to maintain its target stock of asset purchases at £895b.

The dovish tone set by the Federal Reserve was mirrored by the BoE which also upgraded its outlook for the UK economy.

The BoE said that news surrounding “near-term economic activity had been positive” and that “recent plans for the easing of restrictions on activity may be consistent with a slightly stronger outlook for consumption growth.”

The critical statement suggesting the BoE remains committed to its dovish monetary policy stance was clear when it said the short-term prospect may have improved but little has changed in the medium term.

Finally, the Bank of Japan (BoJ) left rates unchanged at -0.1% whilst agreeing to adjust its monetary easing program to respond to the pandemic and keep on track towards its goal of 2% inflation.

It is clear that central banks believe we are moving in the right direction, but rate hikes remain some time away. Economies are rebounding nicely following the coronavirus downturn, however, the expansionary phase we currently find ourselves in has further runway before policy settings are likely to be adjusted.

Employment Data beats

Locally, employment data released last week shocked everyone in a good way.

Expectations had been for the unemployment rate to fall to 6.3% in February so the 5.8% unemployment rate released from the Australian Bureau of Statistics (ABS) was a complete shock.

The economy added 88,700 jobs, exceeding expectations of 30,000 jobs meaning the employment market grew by nearly three times expectations. This was undeniably an incredibly strong figure with the number of employed Australians now reaching pre-COVID levels.

The participation rate held steady at 66.1%.

Certainly, the winding back of the JobKeeper wage subsidy at the end of this month will have a material impact on employment data going forward so we would caution against anyone thinking that we are close to returning to full employment.

We will have a better concept of the ‘true’ employment market in a few months when JobKeeper has fully rolled off and any month-to-month fluctuations have stabilised somewhat.

ASX Weekly Wrap

The ASX200 underperformed the global benchmark last week falling -0.9% relative to the MSCI International World Index which fell -0.3% in AUD terms.

Iron ore prices dipped -6% to trade US$162/tonne which led to miners selling off -4% whilst oil prices fared little better falling -6% with Brent oil retreating to $64/barrel.

In a more ‘risk-off’ week for equities traditional ‘defensive sectors’ such as utilities (+2.2%) and telcos (+1.8%) led the market higher whilst consumer discretionary stocks advanced +1.1%.

The best performing stock in the PRIME Australian Equities Growth SMA last week was Telstra (TLS) which rallied +4.6%.

Whilst there was limited news on TLS specifically it was a case of investors rotating away from growth stocks (specifically the tech sector) and finding other avenues to invest their capital.

TLS is a known ‘bond proxy’ so rising bond yields tend to see increased flows in TLS as rising bond yields make companies who have positive cash flows and free cash flows more attractive.

Importantly for TLS investors, the 8c distribution comprising a fully franked 5c interim dividend payment and further fully franked 3c special dividend payment will hit cash accounts this Friday.

On the flip side the worst performing stock in client portfolios was BHP Group (BHP) which fell -6% on account of the slide in the iron ore price.  

Looking ahead

Monday 22th March 2021 – Friday 26th March 2021

  • Monday: US Chicago Fed National Activity Index (FEB)
  • Tuesday: US Existing Home Sales (FEB), UK Unemployment Rate (JAN)
  • Wednesday: AU Markit Manufacturing PMI (MAR), US New Home Sales (FEB), Durable Goods Orders (FEB), UK Inflation Rate (FEB)
  • Thursday: US GDP Growth Rate Q4, Weekly Jobless Claims
  • Friday: US PCE Price Index (FEB)

Friday 19th March, 5pm values

 IndexChange%
All Ordinaries 6960-55-0.8%
S&P / ASX 2006708-59-0.9%
Property Trust Index1390+18+1.3%
Utilities Index6179+130+2.1%
Financials Index6043-36-0.6%
Materials Index15592-646-4.0%

Friday 19th March, closing values

 IndexChange%
U.S. S&P 5003913-30-0.8%
London’s FTSE6709-52-0.8%
Japan’s Nikkei29792+74+0.2%
Hang Seng28991+251+0.9%
China’s Shanghai3405-48-1.4%

Key dividends

Monday 22th March 2021 – Friday 26th March 2021

  • Monday: Div Ex-Date – Blackmores Limited (BKL), NRW Holdings Limited (NWH)
    Div Pay-Date – ANZPG (ANZPG), ANZPH (ANZPH), WBCPF (WBCPF), WBCPH (WBCPH), WBCPJ (WBCPJ)
  • Tuesday: Div Ex-Date – Carsales.com Limited (CAR)
    Div Pay-Date – Altium Limited (ALU), BHP Group Limited (BHP), Challenger Limited (CGF), REA Group (REA), Sims Limited (SGM), WBCPE (WBCPE)
  • Wednesday: Div Ex-Date – Virtus Health Limited (VRT)
    Div Pay-Date – ANZPE (ANZPE), ANZPF (ANZPF), ASX Limited (ASX), Fortescue Metals Group (FMG), Sonic Healthcare (SHL), Woodside Petroleum (WPL)
  • Thursday: Div Ex-Date – Cochlear Limited (COH), Healius (HLS)
    Div Pay-Date – Downer EDI Limited (DOW), Medibank Private Limited (MPL), Newcrest Mining (NCM), Oil Search Limited (OSH), Santos Limited (STO)
  • Friday: Div Pay-Date – AGL Energy Limited (AGL), L1 Capital (LSF), Origin Energy (ORG), Telstra Corporation (TLS)

Contact

Mark Johnson – Chairman of Investment Committee(03) 8825 4738
Guy Silbert – Investment Manager(03) 8825 4750

If you would like to discuss your situation, please speak to your adviser or email clientservices@primefinancial.com.au

Mark JohnsonT: (03) 8825 4738Cameron MorcherT: (03) 8825 4737
Livio Caiolfa T: (03) 8825 4748Michelle BromleyT: (03) 8825 4751
Marcus AingerT: (02) 9134 6292Nicole LewisT: (03) 8825 4734
Dylan CresswellT: (03) 8825 4707 Nicholas Miller T: (03) 8825 4722
Jarrod Rodda T: (03) 8825 4729

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

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