Sovereign Wealth Partners and InvestSense Pty Ltd
If the first quarter of 2021 was about resurgent optimism, economic reflation and potential normalisation of interest rates, the last three months marked a more pragmatic pause where a more nuanced view of economies and markets still dependent on easy money took hold. Inflation remains the key focus on the macro front, with Central Bank’s monetary policy keeping bond yields trading at a narrow band. With inflation expectations continuing to rise, real yields are falling, a trend not seen since the 2013 taper tantrum. The Fed, and Chair Jay Powell in particular, is highly aware of this and if settling markets was part of his unofficial job description then June would have been a masterclass in skilful Central Banking. He and his peers in Martin Place will maintain that market performance is a just a side-effect of the main mission to preserve and add to employment. Either way, markets were up 1-2% for the month and some 5-10% for the quarter with the US market leading the way. The so-called FAANG (very large US tech) stocks were all up by around 10% for the month and 15% or so for the quarter. Expected interest rates have had an impact and in the topsy-turvy, central bank driven post-COVID market landscape it is difficult to know whether recently lower interest rates are an ominous sign, but for now, it is a case of heads – the bull’s win/ tails – the bears lose. It also raises the question of whether tech stocks, which, in the current environment benefit from lower interest rates, should be seen as the defensive plays. They have also been demonstrably more volatile.
All that has added up to an Australian financial year that rewarded risk-taking with the most aggressive diversified multi-asset funds likely to be up by around 25% and even conservative funds being up 6-8%. Much of that is just part of the rebound from the COVID crisis lows but, even more significantly, diversified funds are now 5-10% above the peaks they reached in February of 2020. This potentially speaks volumes about the disconnect between market performance and the policies put in place to support the real economy. Of course, we may see the other side of this coin if employment levels ever make similar advances. Hopefully (for portfolios that is) the day of rate reckoning won’t be for a while and with the 4th July marking the start of the Northern Hemisphere holiday season we can only hope for quiet markets (rather than any untoward shocks with no liquidity).