August provided another strong month. ASX200 Index finished the month 2.5% higher and the MSCI World index in $Au was also 3.0% higher.
In the US, August payrolls came in much weaker than expected at the end of last week. There were 235,000 new jobs added, versus an expected 733,000. There were extensive upwards revisions for previous months, but not enough to compensate for a very soft result.
We are mindful that wages continue to grow — up 0.6% month-on-month versus +0.3% expected and up 4.3% year-on-year. The unemployment rate also continues to drop — from 5.4% in July to 5.2% in August.
As a result, we think the expectation of a tapering announcement in November, to be commenced in December, remains reasonable.
The key point is this data takes some steam out of the service sector, limiting potential inflation from a large part of the economy, thereby extending the favourable environment for equities. This, combined with Biden’s slumping popularity, may provide impetus for more fiscal stimulus.
In Australia fortunately, June quarter GDP rose a stronger than expected 0.7% indicating that demand growth was still solid prior to the latest lockdowns even though stocks and trade detracted from growth. And of the course the rise avoids, for now, headlines of a double dip recession.
However, the hit to the economy in this half year from the lockdowns is escalating. Based on the extension of the Melbourne lockdown to at least around 23rd September and the ACT lockdown by another two weeks our estimate of the cost of the hit to economic activity from the lockdowns since May has now blown out to $28bn which will mean a big decline in GDP this quarter. We expect September quarter GDP to fall by at least -4%. And a likely constrained initial reopening even when the vaccine targets are hit points to only a weak recovery in GDP in the December quarter. Added to this is the risk that other states may have lockdowns too.
The bottom line is that growth through this year could now come in around zero, which is well below the RBA’s assessment for 4% growth.
That said, while the near-term outlook is bleak there is good reason to expect a strong rebound in growth through next year as vaccination rates ramp up, we learn to live with covid as vaccines help keep hospitalisations and deaths down, pent up demand is ultimately unleashed, Australia benefits from strong growth globally and monetary policy is easier for longer. As a result, we see 6.5% or so growth through next year.
There were four key themes to highlight from the full-year reporting season in Australia.
- Rising fears of a slowing global economy. This led to underperformance in the mining and energy sectors.
- Elevated merger and acquisition (M&A) activity. 2021 has already broken through previous highs in terms of the dollar value of M&A activity with four months still left to run. This reflects strong confidence in board rooms.
- Confidence in a demand rebound. Management teams pointed to a better-than-expected June quarter – before restrictions were imposed – as evidence of strong underlying demand when the economy does re-open.
- ESG (Environmental, Social and Governance issues) were major factors in corporate strategy. This was evident in BHP’s (BHP) shift out of oil and gas; moves by Woodside (WPL) and Santos (STO) to create scale to de-risk and become more cash-generative; more detail around Fortescue’s (FMG) FFI project; and BlueScope (BSL) flagging a need to invest in decarbonisation.
The equity market continued to grind higher in August despite the challenge posed by the Delta spread.
Paradoxically, we are in an environment where the constraint on growth from Delta supports markets, given that it means policy remains easier for longer. But while shares keep powering on month after month, the risk of a short-term correction remains – with threats from coronavirus, the approach of Fed tapering, the US debt ceiling and tax hikes and supply constraints and as the next six weeks is often rough for shares. However, the likely continuation of the economic recovery beyond near term interruptions, vaccines ultimately allowing a more sustained reopening and still low interest rates with tight monetary policy a long way off augurs well for shares over the next 12 months.
Cash and bank deposits are likely to provide poor returns, given the ultra-low cash rate of 0.1%. The setback from coronavirus lockdowns could push the first rate hike back into 2024.
Source: AMP Capital, Pendal Group.
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