The past financial year provided windfall gains for investors. With the recession and profit slump associated with coronavirus already factored in and giving way to recovery, and vaccines and stimulus providing confidence it would continue, the past financial year has been very strong for growth assets.

Global shares returned 37% in local currency terms. A rebound in the growth sensitive Australian dollar saw this reduced to a still very strong 28% in Australian dollar terms.

Australian shares returned 28% helped by a sharper rebound in the Australian economy, a surge in profits and numerous companies reinstating or increasing their dividends. Of course, this followed a 7.7% loss the previous financial year.

The past few weeks have all been about covid for our Sydney clients. Australia is still a relatively lowly vaccinated country, which has meant that lockdowns are necessary to control the spread of coronavirus to limit pressure on the hospital system and prevent deaths following the latest outbreaks. The good news is that the snap lockdowns in Darwin, Perth and Queensland all ended very quickly because they started early when the number of local new daily cases was low (at 1-5) and so they were quickly able to bring new cases down enabling the lockdowns to be ended quickly.
Unfortunately, the Sydney lockdown started later in terms of new daily cases (averaging around 20 a day over the prior 3 days) and so far, has been relatively light as far as lockdowns go (with much retailing still open) and so is taking longer to work having already been extended to three weeks. So, it makes sense that the Government has toughened it. It should still be relatively short compared to those seen overseas and the Victorian lockdown that started in July last year (when there were over 60 new cases a day) but it’s still too early to say when it will end — particularly with new daily cases, the positive testing rate and new cases not isolating while contagious all yet to peak. Victoria of course learned the lesson of last year by starting its May lockdown when daily new cases were running at a relatively low 10 and was rewarded with coronavirus coming under control relatively quickly and so its lockdown was limited to two weeks. Unfortunately, NSW failed to learn that lesson.
The economic impact is now clearly evident in our Australian Economic Activity Tracker which fell back again over the last week reflecting further declines in restaurant and hotel bookings, mobility and retail foot traffic. Our rough estimate is that the Sydney lockdown is costing $1bn a week meaning that if it runs for the three weeks as currently scheduled then it will cost $3bn. Added together with the Victorian lockdown in May-June costing around $1.5bn and another $0.5bn from the recent lockdowns in Perth, Queensland and Darwin it means a hit of around $5bn spread across the June and September quarter or a 0.1% hit to each quarter. If things bounce back reasonably quickly as they have after past lockdowns, then the economic impact will be pretty small for the September quarter and the economic recovery won’t be disrupted.  However, if the Sydney lockdown is extended much beyond the current three weeks it will progressively cause more damage and take longer to recovery from. It will also require more government lockdown assistance which has already been increased and/or made easier to access in order to minimise the economic impact. Fortunately, banks are already offering debt repayment deferrals for affected small business and home loan customers which will as we saw last year limit any negative impact on the property market.
Source: AMP Capital
US data releases were a bit mixed with the ISM services conditions index down in June but still strong, the employment component down sharply and job openings up less than expected and initial jobless claims up slightly although continuing claims continued to fall.
Eurozone business conditions were revised up in June and May retail sales rose 4.6%mom helped by reopening, but German factory orders were soft.
Japanese household spending fell in May reflecting the state of emergency, but June economic sentiment rebounded as it was removed. Of course, the latest state of emergency in Tokyo may see indicators fall back again.
Chinese services conditions fell sharply in June suggesting smaller businesses may be seeing a tougher time explaining why the authorities are moving towards making it easier for banks to lend. Meanwhile, consumer and producer price inflation both slowed in June to 1.1%yoy and 8.8%yoy respectively with core CPI inflation running at just 0.9%yoy. Inflation pressures may have peaked in China and there is not much flow through of higher producer prices.
Australian economic data was mostly good. Australian home building approvals fell sharply again in May reflecting the end of HomeBuilder but they remain strong and their lagged increase points to a further increase in dwelling construction this year. Retail sales were revised up in May and even if they fall -1% in June on the back of the lockdowns are on track for a strong June quarter rise. Meanwhile, payrolls are up 3.4% on pre-coronavirus levels and ANZ job ads rose another 3% in June. Finally, the Melbourne Institute’s Inflation Gauge points to a pickup in inflation in the June quarter but nothing like has been seen in the US, which will keep the RBA relatively dovish for now on rates.
Shares are vulnerable to a further short-term correction with possible triggers being coronavirus Delta variant related setbacks, the inflation scare and US taper talk and geopolitical risks. But looking through the inevitable short-term noise, the combination of improving global growth and earnings helped by more fiscal stimulus, vaccines allowing reopening once herd immunity is reached and still low interest rates augurs well for shares over the next 12 months.
Still ultra-low yields and a capital loss from rising bond yields are likely to result in negative returns from bonds over the next 12 months.
Unlisted commercial property may still see some weakness in retail and office returns but industrial is likely to be strong. Unlisted infrastructure is expected to see solid returns.
Australian home prices now look likely to rise 20% this year before slowing to around 5% next year, being boosted by ultra-low mortgage rates, economic recovery and FOMO, but expect a progressive slowing in the pace of gains as poor affordability impacts, government home buyer incentives are cut back, fixed mortgage rates rise, macro prudential tightening kicks in and immigration remains down relative to normal.
Cash and bank deposits are likely to provide very poor returns, given the ultra-low cash rate of just 0.1%. We remain of the view that the RBA won’t start raising rates until 2023.
Source: AMP Capital, Pendal Group.
Important note: While every care has been taken in the preparation of this document, Farrow Hughes Mulcahy make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.