Foreign exchange markets were near unchanged across the quarter. This was not without interim volatility, however.

Most currencies outside the US Dollar initially rallied to begin the quarter but gave back nearly all the gains by the end of June. All currencies apart from the Euro slightly weakened overall across the quarter.

This fall occurred sharply on 14 June 2021 as a result of the Federal Reserve meeting where they outlined that they were bringing rate hike expectations forward. This would mean that rates would be relatively more appealing in the United States than other regions such as Europe and Japan which have not signalled that they will increase rates.

Higher rates of return on cash will continue to entice money into the United States given no other major currency shocks.

The fixed income market is currently in a whirlwind of emotions as it tries to price in inflation, future growth expectations and central bank forward guidance all at once. Government bond holders were rewarded handsomely across the quarter as yields fell sharply in a reverse of the upwards trajectory that began in late 2020 after the news of vaccine efficacy broke.

The bond market does not appear to be pricing in substantially higher growth or inflation in the long run as the deflationary, low growth forces of the past 10 years seem even more prevalent now.

The fixed income market has been extremely reactive to central bank policy decisions and minutes as well as economic data releases in the last three months. This is a very uncertain market that is trying to find a direction. These dynamics can change abruptly and quickly.

The unemployment rate has been a key indicator in understanding how well countries are returning to ‘normal’ economic conditions as the world recovers from the greatest recession since the Great Depression in the 1940s.

Highlighted by the chart, over the past three months Australia has not only returned to unemployment levels seen before the pandemic but has actually fallen slightly below these levels with the latest 5.1% unemployment rate. Normalisation of employment conditions is something Australia has been able to achieve relative to the United States which has flattened out at a rate ~2% higher than the pre-COVID level, suggesting a slower labour market recovery. 

22 million jobs were estimated to have been lost during the pandemic across developed nations. 21 million jobs were also saved due to job retention schemes deployed by Governments.  Australia has been able to navigate and successfully re-engage the labour market in order to minimise long lasting economic damage. In Australia, these took the form of JobSeeker and JobKeeper.

The Current Account measures exports minus imports across whole countries. Simply, a number above zero means the country is producing more than it is consuming and identifies whether there is more money flowing into or out of a country. Australia has recently moved into surplus in this metric.

This is a positive for the Australian economy as exports in iron-ore, cereals and grains sky-rocketed. The recent run-up in commodity prices is aiding this surplus and paints a positive economic picture for Australia going forward. This surplus will also put upward pressure on the Australian Dollar.

This is in stark contrast with the United States as they continue to send money to other countries around the world via mass importing and non-substantial exports, further echoing the hollowing out of the production base of the United States. This could put further downside pressure on the US Dollar.

The rate of fully vaccinated individuals has significantly increased over the course of 2021.

As vaccination rates increase, governments have begun putting in place plans to lift all restrictions regardless of the abundance of COVID-19 in the country as it is thought of as more like the common flu. The current thinking in highly vaccinated countries is that the hospitalisation and death rates should reflect an impact on the health system similar to the flu virus that goes around each year. This is very positive for markets if this proves to be correct.

Although Australia currently lags the major developed countries in vaccination rates, the government has outlined that there is a plan in place once vaccinations hit the desired level. This level should be reached within the next three to four months due to the significant lag that the AstraZeneca vaccine needs for people to be fully vaccinated (three months).

This three month wait between doses is being discussed on whether it should be shortened to two months to deal with the current NSW outbreak.

Equity market performance will continue to be a function of the success of global economies opening up, as well as the effects COVID-19 variants have on both majority vaccinated and unvaccinated countries. The recent Delta variant is a prime example of this having effects on the reopening trade.

The value trade that had started in late 2020 has cooled-off heavily in the recent months due to falls in longer-term growth prospects and inflation fears subsiding. As the world is saturated in both public and private debt, robust continued economic expansion appears to be a potential victim.

This does not mean there will be zero economic growth, as there has been a significant run of improving economic conditions from the depths of the crisis. It means that in a medium to long-term view, continued robust expansion may have limited upside. These economic conditions of low growth and low inflation existed from 2012-2020.

Research believes it is likely that this environment becomes prevalent once again as all the factors that generated this environment appear more abundant - extremely low interest rates and high levels of global debt. The primary beneficiaries of this environment, at least in the short-term, may be growth oriented stocks that do not rely on higher interest rates or economic expansion, namely Technology and Healthcare.

Long-term interest rates are likely to remain subdued and pushed further towards the 0% lower bound over the medium to long term as the 40-year bond bull market appears to be alive and well for the time being. As the Federal Reserve potentially looks to raise rates in 2022-2023, there could be some rises in longer term interest rates. These increases are unlikely to maintain upward momentum to reverse the bond bull market.

Central banks will find it difficult to raise rates within a world where global debt reached $380 trillion dollars by the end of 2020.

General Advice Warning
This update is issued by Ventura Investment Management Limited (AFSL 253045), which is a related body corporate of Centrepoint Alliance Limited.

The information provided is general advice only and does not take into account your financial circumstances, needs or objectives. Where you are considering the acquisition, or possible acquisition, of a particular financial product, you should obtain a Product Disclosure Statement for the relevant product before you make any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. It is imperative that you seek advice from a registered professional financial adviser before making any investment decisions.

For more information, refer to the Financial Services Guide (FSG) for Ventura Investment Management Limited (available at https://venturafm.com.au/media/1729/ventura-fsg-update-nov.pdf).

Disclaimer
While Centrepoint Alliance Limited and its related bodies corporate try to ensure that the content of this update is accurate, adequate and complete, it does not represent or warrant its accuracy, adequacy or completeness. Centrepoint Alliance Limited is not responsible for any loss suffered as a result of or in relation of the use of this update. To the extent permitted by law, Centrepoint Alliance Limited excludes any liability, including negligence, for any loss, including indirect or consequential damages arising from or in relation to the use of this update.