Monthly performance- August 2021

Sovereign Wealth Partners and InvestSense Pty Ltd

 

 

Market Commentary

August was another positive month for equity markets with the US Nasdaq leading the developed markets with a return of 4% and most other Western and Asian markets up by 2%. Interestingly, there were even bigger sparks in some emerging markets with India, many Eastern European markets and Argentina up by 10% or more. Some of the smaller South American markets leapt by some 30%. The binding theme is that, for now at least, COVID cases are bottoming out due to a degree of herd immunity (two thirds of the population in India have COVID antibodies while only 10% of the population are fully vaccinated).

Meanwhile, Australia was up slightly for the week and up 2% during August. While the local market enjoyed a fairly strong reporting season across the board, there is no doubt that the banks did the heavy lifting and accounted for most of the gains. At the other side of the ledger, falling iron ore prices meant that Australia lagged behind other countries (BHP alone dragged the index down by 1.2%). Other highlights included the take-over offer for Afterpay which added almost another 0.5% to the index. Good or better than expected results from healthcare and real estate stocks also helped. While most consumer staples and discretionary sectors generally reported good earnings for FY20/21, forward guidance was muted given the surge in Delta cases and nationwide lockdowns.

Here and abroad, a common refrain was that rising costs are having an impact, and where the firm has little pricing power or limited access to skilled labour it is increasingly a negative factor (noted by most companies that missed their estimates).

Commodity markets were generally noisy but flat overall. The biggest falls came from the one that matters for Australian investors, iron ore, which was down 20% throughout August. While iron ore prices are now down 40% from their peak, they are also only back to where they were in March. Energy prices were also down sharply in August.

Government bond rates edged up around 0.1%-0.2% in most developed markets. This was due to the ‘taper talk’ which started to enter the market conversation, but with the timing pushed back a month or two due to concerns around the near-term impact of the Delta strain on mobility and supply chains. The tension between these two themes is probably going to be the most important thing to watch in markets during September.

 

 

Looking Forward

As mentioned above, markets are generally looking through Delta induced weakness and most forecasters are still seeing higher interest rates at the end of the year. How much higher is a big question and this is likely to be determined by how different central banks ‘talk about tapering’ or reduce the amount of government bonds they buy each month. Interestingly, the focus is shifting from the US to other jurisdictions who might take the lead on this earlier. We saw the first signs of this last week with the RBA going ahead with its asset purchase tapering, despite Australia still being in the midst of an aggressive lock-down. The Reserve Bank of New Zealand similarly seems keen to ‘get on with it’ and there are even hawkish elements in the European Central Bank (Holland and Austrian representatives in particular).

 

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