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January Market Update: volatility, stability or profitability on the horizon? Posted on February 19, 2021
There is much to consider in this January 2021 market update. We’ve included a high level of detail so to accommodate all types of investors. Australia is in a much better position than anticipated at this front end of the COVID-economy recovery. Whether you’re a pre, new or seasoned investor, we believe that careful navigation and evidence-based action can result in a number of opportunities in 2021.
At a glance
- Volatility associated with November’s US election should finally be over, enabling investors to refocus on economic prospects and the outlook for corporate profitability & central bank policy.
- Central banks kept policy settings unchanged and governments remained focused on administering the rollout of Covid vaccines.
- Encouragingly, the International Monetary Fund increased its global GDP growth forecast for this year by 0.3%, to 5.5%. The upward revision reflected the expected positive effects of vaccinations, additional policy support in major economies including the US and Japan, and an expected rise in contact-intensive activities as the pandemic eases.
- Australian inflation recorded at 0.9% in the 2020 calendar year, nearly double what the Reserve Bank of Australia forecasted in November’s Statement on Monetary Policy.
- The employment picture is also less bleak than previously forecast. At 6.6%, the unemployment rate was more than a full percentage point below the Reserve Bank’s November forecast.
- Considered together, these encouraging indicators suggest the economy might be performing better than previously expected. If data released over the next three months affirms this, the Reserve Bank of Australia will likely start to taper its quantitative easing program in April.
- The Australian dollar was little changed in January, after appreciating by nearly 10% in November and December.
- The ‘Aussie’ was similarly flat against other majors, moving by less than 1% against the Japanese yen and a trade-weighted basket of international currencies.
- Much like December, Australian equities rallied strongly through the early weeks of January as domestic economic data improved and as certainty over the US election revitalised optimism that a new stimulus program would be approved.
- However, broad-based profit taking, combined with concerns of slowing iron ore demand, drove the local share market lower in the final week of January. As a result, the S&P/ASX 100 Accumulation Index finished the month just 0.4% higher.
- Strong performances from IDP Education, Wesfarmers and JB Hi-Fi helped the Consumer Discretionary sector (+5.7%) to outperform.
- International education organisation IDP Education was among the best performers, adding 15.8% on expectations of market share gains and growth opportunities in the US.
- Consumer goods retailer JB Hi-Fi (+6.5%) benefited from a trading update that reported continued strong demand for electronics and home appliances.
- The rise in oil prices – which was driven by a surprise cut in crude oil production from Saudi Arabia – helped the Energy sector rise 1.8%.
- Conversely, the poor performance of iron ore miners – driven by concerns of declining Chinese demand given rising iron ore inventories – dragged the Materials sector -1.0% lower.
- The Industrials sector (-3.5%) was among the poorest performers. Travel-exposed companies, such as Sydney Airport (-10.8%) and Qantas (-7.2%), struggled given the possibility of prolonged international border closures.
- Australia’s smaller companies underperformed their large cap counterparts, with nearly two-thirds of constituents in the S&P/ASX Small Ordinaries Accumulation Index (-0.3%) losing ground.
- Real estate markets remained largely subdued amidst the countervailing forces of a dreary near-term Covid-19 outlook and optimism around a potential return to ‘normal’ conditions in the second half of 2021 on the back of several vaccines being rolled out.
- Locally, the A-REIT market declined -4.1%, with the Industrial and Office sub-sectors falling most significantly.
- Among individual names, Stockland (+6.5%) and Ingenia Communities (+2.0%) both outperformed against the backdrop of an improving housing market.
- Emerging markets led performance over the first month of 2021, with the MSCI Emerging Markets Index rising 3.7%.
- Less positively, developed markets – represented by the MSCI World Index – returned -0.4%, both in Australian dollar terms.
- Asian bourses generally maintained their recent positive momentum. The Hang Seng Index in Hong Kong and China’s CSI 300 Index rose 3.9% and 2.7%, respectively, both in local currency terms.
- In the US, the last week of January saw a modest spike in volatility due to the influx in retail trading. Selected names – most notably Gamestop – saw extraordinary share price increases, but several large cap companies slid downward. This dragged the S&P 500 Index 1.1% lower for the month.
- Encouraging company results for the December quarter appeared to prevent the market from falling more significantly. Earnings in the banking sector were ahead of consensus expectations, for example.
- European markets also had a miserable start to the year, troubled by low vaccination rates and a shortage of vaccine supplies, at the same time as the number of Covid infections continued to rise. The Euro Stoxx 50 Index returned -2.0% in local currency terms.
Global and Australian Fixed Income
- US Treasury yields rose meaningfully. Ten-year yields closed the month 15 bps higher, at 1.07%.
- The move higher in Treasury yields set the tone for other major bond markets globally. Yields rose similarly in the UK and Australia, and by a smaller margin in Germany and Japan.
- These moves resulted in negative returns from global bonds.
- At the same time, fixed income investors continued to dissect commentary from central bank officials, looking for clues regarding future interest rate policy. With that in mind, releases of inflation and GDP growth statistics will remain closely scrutinised in the weeks and months ahead.
When it comes to investing in the share market, one of the businesses we partner with in order to provide accurate and timely investment research, ratings and implemented solutions is prominent Australian business Lonsec. We first work with you to define your goals and objectives, and then tailor an investment portfolio to best achieve those, manage downside risk, and hand-pick high quality investments for optimum security and return. The level of research, knowledge and experience we are able to combine with Lonsec is designed to help you be better off now and in the long run.
If you’re interested to learn more about the investment opportunities available to suit your circumstances, please feel free to book a complimentary meeting with our Financial Services team: 02 4320 0500.