Macro Matters – June 2021

(Source: Merlea Macro Matters)


Just over a year into the COVID-19 crisis, it is apparent that there is great urgency for governments to address an overlapping set of issues—among them health, climate, nature, resilience, recovery, jobs, and inequality.

Government ambition must be reflected in the willingness to undertake policy reforms and to put in place new investments that will transform economies in the desired direction. Those new investments must be financed. For most emerging markets and developing countries, a sizable portion of the finance must come from abroad in the form of debt. Debt levels have risen such that governments in half of all low-income countries are either already in debt distress or at high risk. Of the other half, only 11 low-income country governments are classified as having a low risk of debt distress. Most of the low-income countries in debt distress, such as Mozambique, Somalia, Sudan, and Zimbabwe have had long track records of development distress. Governments need to continue to borrow and invest. The private sector will not be a substitute. The developing world is therefore currently facing twin crises—a balance of payments and debt crisis that may upend development progress, and a development crisis that could erupt into a debt crisis as the state of the economy deteriorates.

Central bankers on both sides of the Atlantic say that these price rises are a temporary consequence of the whiplash effect of the COVID-19 pandemic on demand. Supply chains in everything from commodities to semiconductors have been disturbed by demand first collapsing and then surging back, making prices very volatile. On this rationale, inflation will settle down once the pandemic recedes. Critics point to the risks of price pressures setting off a chain reaction where everyone expects future price rises, causing a true inflationary episode where prices persistently increase across the board. As economies recover and big ones continue to benefit from massive injections of government stimulus, a wonky and sometimes scary buzzword has crept back into the conversation: inflation.

A little bit of inflation is no bad thing. But too much of it can be really, really damaging to economies and livelihoods. Inflation is in the news because economies are gearing up again and that some governments – notably that of the United States – are spending a lot of money to help their economies recover their pre-pandemic mojo. When an economy is overheating, demand for goods and services grows so quickly that it outpaces supply, driving up prices. That can incentivise firms to take on debt to boost their capacity, in the expectation that the good times will only get better. That doesn’t sound so bad, but it can be if prices start spiralling upward. Some are worried that if that happens it could prompt the US central bank, the Federal Reserve, to raise interest rates – which cools demand and economic growth.  Then all that spare capacity businesses sunk money into would likely be idled, which means businesses start to lay off workers.

Modern Monetary Theory

Modern Monetary Theory is just a politicisation of fiscal spending with unlimited constraint. The idea is that governments spend as much as needed to achieve the desired outcome and worry about financing the deficit at a later stage.

After the abject failure of QE to generate any sustainable growth or inflation, the political dial has now turned to fiscal policy. Now, governments are always keen to inflate away their debt — by running inflation higher than the nominal yield on the debt that they issue. This policy is called financial repression and is one way to deleverage an economy (reduce debt). Interestingly, the reduction in debt generally happens via growth in the economy (i.e., higher GDP), which reduces the debt as a percentage of GDP but rarely a reduction in the absolute level of debt. Since only very low inflation could be generated, interest rates had to go even lower to try to reflate the economies but also to enable negative real interest rates (to repress you and I!).

Rest assured, further financial repression is both required and necessary to reduce global debt levels, but the current rate of progress is too slow. The theory that a government cannot default on its debts if those debts were issued in its own currency is not new. It is hard to argue that significant expansion in infrastructure, housing, technology, transport, and education would not boost the economy and, would surely have a much bigger multiplier effect than QE. The tricky bit is how it is financed and the potential repression (redistribution) of wealth that goes with it.


In history, high levels of debt were often associated with war-time spending. The call for financial repression to stem the debt burden these days, however, is a result of gradually built government indebtedness that seeks financing. As governments failed to engage in countercyclical fiscal policies over longer periods, government revenues fell short of their expenditures. Deficits were all but odd. In many countries, the average fiscal deficit-to-GDP ratios were twice as high as the average GDP growth since the 1990s. When the financial crisis swept the advanced economies, bailout measures added to the debt mountain. In the post-2008 era, easy monetary policy was offset by fiscal austerity. This time, however, fiscal, and monetary policy are both pulling in the same direction. The numbers are also astronomical. Few would argue that, in the wake of a global pandemic, extraordinary government spending was unjustified. But regardless, this debt must be repaid.


There are ultimately only four ways to reduce government debt to GDP:

  • Default on your debt
  • Outgrow your debt
  • Raise taxes and/or cut spending
  • Inflate the debt away

Clearly, default is untenable for major developed economies. We can also discount the second option, which is typically based on hope rather than realism, not least because very high levels of debt are associated with lower rates of growth. The third option, higher taxes and/or spending cuts, is likely to play some part. But in the current environment, after the years of austerity that followed the GFC, there seems to be little appetite for further large cuts to public spending. Meanwhile, substantially higher taxes are always politically difficult, and even sharp hikes in headline tax rates will not raise the amounts that are necessary.

This brings us to the concept of “financial repression”. Financial repression can take different forms, but its key pillars are:

  • Explicit or indirect caps or ceilings on interest rates, for example, central banks’ buying longer-dated debt to keep interest rates low. The creation of a captive domestic audience of domestic buyers through capital controls or prudential regulatory measures. For example, compelling insurance companies, banks, or pension funds to hold a certain amount of their assets in domestic government debt, despite negative real yields.
  • Controlling lending, either through direct ownership of banks or “moral suasion” (the act of persuading a person or group to act in a certain way through rhetorical appeals, persuasion, or implicit and explicit threats).

In the presence of inflation, financial repression would see nominal interest rates held artificially low so that real interest rates are negative, which over time has the effect of lowering government debt levels. Alternatively, real rates are positive but still artificially lower than the rates governments would ordinarily have borrowed at, thus imposing a financial repression ‘tax’ on debt holders.

To accomplish this, governments and central banks must first generate the inflation needed, and in recent years this has been easier said than done. Factors such as globalisation and rapid technological advances have proven to be formidable headwinds, depressing the prices of goods and wages, and thwarting central banks’ efforts. Even the act of “printing money” through QE after the 2008 financial crisis failed to achieve inflation, despite many warnings at the time that these unconventional measures would lead us down a path of hyperinflation.

What is different this time:

  1. Fiscal, and monetary policy are both pulling in the same direction. The numbers are also extraordinary.
  2. Monetary and fiscal stimulus comes at a time when households have accumulated large savings during lockdowns. As economies are reopened, they are expected to greatly increase spending.
  3. Governments have succeeded through the various government credit guarantee or subsidy schemes, examples being the Paycheck Protection Program in the US, the Coronavirus Business Interruption Loan Scheme in the UK, or the Coronavirus SME Guarantee Scheme in Australia.
  4. Finally, central banks have recently made it clear that they are willing to risk inflation overshooting their targets to make up for years of below-target inflation.


A sharp rise in bond yields has stock markets twitching, as shares pull back from their highs on fears inflation may become a real problem for global economic growth. Bond yields have been rising on the back of expectations we are entering into a period of reflation, where central banks and governments boost economic activity through fiscal and monetary measures to encourage growth and a modest level of inflation.  However, vaccine rollouts and the Biden administration’s $US1.9 trillion stimulus package has increased fears reflation will give way to runaway inflation. This is not just a US phenomenon.

European inflation expectations started rising last November. A good part of these pressures is due to rising commodity prices. Energy prices have jumped, food commodities have been rising and metals and bulk commodities, such as iron ore, have been strong.

As inflation rises, bond investors concerned about the eroding value of their fixed-interest yields start to sell. This leads to rising yields, given that prices and yields have an inverse relationship. The world economy remains distorted by COVID-19’s impact – manufacturing bottlenecks will take time to clear and excess services capacity could keep inflation restrained in many sectors while both demand and supply recover. Inflation is not a bad thing. It is an indicator that the global economy is not just recovering, but normalising. It is possible that a massive bull run in bonds may be over.

Share markets usually slide as bond yields rise. Bond interest rates have an impact on the price of all long-duration assets. The greatest beneficiaries of declining bond interest rates were businesses with earnings way out on the horizon, especially those companies that are profitless today but are forecast to earn a lot in the future. When rates start to rise, intrinsic values start to fall. The rise in bond rates from 0.5% to 1.58%, when applied as a discount rate, results in a decline of 27.4% of the present value of a dollar earned in 30 years.

The current (as at 25 May 2021) US 10-year Treasury bond yield of 1.58% is more than triple the 0.51% Treasury bonds traded at a year ago. Consequently, stocks are under pressure and those hit hardest were the same stocks that benefited most when rates were declining, as shown in chart above. Typically, the early stage of rising bond yields reflects optimism about accelerating economic growth and improving business conditions. This is a positive for equity markets generally. During the initial period of recovery both bond yields and equity markets can rise in tandem.

As the recovery from recession matures, continued increases in bond rates prove counter-productive, kerbing economic growth. The yield curve begins to flatten spelling trouble for equities, and presumably long-duration growth assets and cyclical assets such as commodity related assets and commodities.

Although we are coming out of an abnormal situation and impacts may be muted by the reaction of policymakers and central banks. We are taking this as an opportunity to rebalance clients’ portfolios – either taking profits on existing positions or using a “buy on the dip” approach.

Listed Property

A-REITs provide a diversified and liquid investment in commercial property with a minimal initial investment amount. Institutional managers select assets to provide investors with access to a wide range of commercial property sectors, including office buildings, shopping centres, industrial facilities, plus non-traditional asset classes like service stations, childcare centres, manufactured housing, pubs, self-storage, data centres and farmland exposure. Record-low interest rates present a significant challenge for investors and their advisers seeking a healthy income yield, particularly for those depending on income from investments in retirement. With interest rates expected to remain “lower for longer”, Australian Real Estate Investment Trusts (A-REITs) are well placed to generate reliable levels of income, with the potential for capital growth.

Earnings across the sector fell 5% in FY21 compared to FY20 and are expected to grow 9% into FY22. This directly affects the distributions paid by A-REITs to investors. Distribution rates in FY21 fell 6% from FY20 levels and in FY22 are expected to grow by 11%. Investors can expect an income yield of approximately 4.1% in FY22, based on current pricing levels, with this income backed by contractual income obligations. This is a “yield premium” over the current RBA cash rate of 400 basis points [the RBA cash target rate was 10 basis points, at May 2021].

The distribution rate compares to the earnings yield of 5.9%, which implies A-REITs are paying out only around 70% of earnings to investors.

This ratio is expected to rise as companies become less risk averse. The ratio is expected to climb closer to 75% in FY22, back to pre-pandemic levels. Globally, A-REIT yields are compelling, as the chart above shows. While the Australian economy has been affected by recent events, it’s in much better shape than many global peers. Australia’s GDP fell -1.1% during 2020, well ahead of other developed nations such as the UK, which fell -9.9%.

Our population growth is also expected to be strong over the long term, given our handling of the crisis. Strong population growth drives positive property-market fundamentals as demand for food, clothing, and accommodation increase. On the supply side, most of the underlying property sectors are well positioned.

Debt and gearing have not been issues in the recent economic downturn. Average gearing levels (debt to assets) are around 24% and interest cover is around 5.5 times. The better management teams in property have been selling non-core assets to reduce debt even further. The A-REITs sector benefits from solid operating fundamentals, low gearing and strong interest cover, good distribution coverage and strong demand for institutional-grade real estate. A continuation of low interest rates, reasonable consumer confidence, and corporate activity/M&A will support the sector.

Australian Equities

Australia’s economic recovery is likely to be uneven, and certain sectors are expected to continue to suffer from the drag of strict international border closure for some time yet. With key state and federal elections due in 2023, fiscal policy is not expected to tighten much as the pandemic programmes start to unwind. With the Scott Morrison Government doing well in the polls, an early federal election in 2021 cannot be ruled out, despite the Prime Minister affirming recently that he is a ‘full termer’.

We expect GDP to grow by 4.4%, reaching its pre-pandemic level by Q3 2021. Consumer and business confidence are now back above pre-Covid-19 levels. Whilst there are still challenges in 2021, a combination of restricted spending during the lockdowns and income support has driven household saving rates to record levels.  The focus for fiscal policy is now a strong private sector recovery, including income tax cuts and substantial investment incentives. Housing finance and construction has recovered strongly, driven largely by owner-occupiers and first home-buyers. Strong gains in housing prices are expected this year. While international borders remained closed, both tourism and services exports are likely to remain weak in H1 2021. The heightened trade tension with China remains a key downside risk for the domestic economy, particularly for exports of education and tourism. The Australian economy as being in as good shape as any of the developed economies. Most companies are seeing activity and profits rebound and Aussies with few foreign travel options, are spending more at home. Australian investors have driven the market higher as they seek returns, with property prices at record highs while historic low interest rates mean there’s little to gain from parking cash in the bank.

The S&P/ASX 200 Index, which represents Australia’s 200 most expensive stocks, rose by 2 per cent in the March quarter but the strong returns disguised divergent performance at the sector level.  Investors have rotated out of 2020’s winning growth stocks and into undervalued stocks. Sector rotation is being driven by the ongoing Australian economic recovery and optimism about the global coronavirus vaccine rollout.  Markets look fantastic, but there’s not a lot of margin for error. If things get ‘too good’ in the economy, that is bad for markets. We almost need the Goldilocks situation to continue — not too cold not too hot. A little bit of caution is warranted in my view.

Global markets

We are cautious about global equity markets at present and running more defensive portfolios. This is because we face an extraordinary cocktail of circumstances that skews risks to the downside. The global economy has become increasingly synchronised over the course of the year. The higher vaccination rates in Europe and the U.S. led to economies re-opening and joining in on the positive momentum by those, mainly Asian, economies which had done a better job in containing the spread of COVID-19. However, the spike in virus numbers across Asia and the renewed restrictions on mobility are creating delays to this virtuous path towards synchronised global growth.

The pick-up in case counts in some parts of the world and the ongoing inflation worries were largely offset by economic data that pointed to stronger economic activity. Developed market (DM) equities rose 1.5% over the month and emerging market (EM) equities were up 2.3%. This was the first month that EM equities outperformed DM equities since January. Movements in bond yields were relatively contained as the Australian 10-year government bond fell 6bps to 1.63% and the U.S. 10-year a similar amount to 1.58%. The move in the nominal yield masks the movement below the surface as inflation expectations continue to rise and real yields fall.

Inflation remains the key focus on the macro front, notably in the U.S., given the spike in the April reading and the growing view that tight supply chains, semiconductor shortages, higher commodity prices and falling unemployment rates could mean inflation proves to be stickier than some central banks currently believe. The inflation risk is perhaps strongest in the U.S. labour market, which is disrupted by supplementary unemployment benefits and expectations of further fiscal stimulus. The core reading of inflation in the U.S. surged by 0.9% month-over-month (m/m) in April, the largest monthly gain since 1981. Meanwhile, in Australia, inflation readings remain subdued and the core rate of inflation was only just over 1% and wage growth was at an unexciting rate of 1.4% year-over-year (y/y).

Rising input prices may start to pressure margins and more companies have highlighted the risks around being able to source raw materials or appropriately skilled labour. Pricing power of companies should be monitored closely when assessing the still very positive earnings outlook globally.

Vaccination rates and inflation will continue to dominate the market view in the near term, however, as we head towards the middle of the year, prospects for growth remain bright. Investors may become more discerning in country allocations as vaccination rates vary across the globe and they assess the possibility for monetary policy divergence on this basis.


The US economy has been growing at a remarkable pace, as consumers engage in a post-pandemic return to a more normal life.  Invesco Fixed Income believes this is likely to continue throughout this year and we expect the US economy to grow more than 7% for 2021 in its entirety – this would be a remarkable outcome, driven by aggressive policy support and the inspirational work to quickly develop a vaccine.  We expect the US economy to surpass its 2019 size in the second quarter and return to its pre-pandemic growth trend by the end of this year.

In my view, the key thing to watch over the next year to gauge the likelihood of persistent inflation will be wages.  Past recoveries have been unable to generate persistent wage increases, even at low unemployment rates.  The sheer momentum of this recovery and size of policy stimulus may mean it will be different this time.  By our estimate, the US economy should be close to full employment at the end of this year, with the economy growing well above trend.  Rising wages would likely feed through into persistent inflation.  As the US economy returns to full employment, we believe wages will be a key indicator to watch to understand the risk of persistent inflation. How the Fed would react to upside inflation momentum is difficult to know.  It has gone out of its way to emphasise that it will not raise rates until inflation is above 2% and expected to remain above 2% for a period.  This implies that the Fed would be slow to respond to inflationary pressure.  In that situation, we may see the return of the bond vigilantes and see bond yield curves steepen to price in a Fed that is well behind the curve.  Stock and bond markets have been in a sweet spot in recent quarters, with strong growth momentum and extremely easy policy.  Any signs of persistent inflation in the second half of this year should be a warning sign that stock and bond markets may move from a sweet spot to a rougher patch. Inflation jitters are likely to keep the S&P 500 in a tight range until early July. In July companies will start reporting earnings results for the second quarter—until then, I don’t believe the S&P 500 will go much beyond 4,200.

Looking ahead to the second half of 2021, we think there are some notable market risks associated with the combination of peak economic/earnings growth rates, higher inflation, Fed policy and some stretched sentiment conditions. Specific to Fed policy, the Fed has been trying to establish “hotter” inflation to counteract the negative effects of inflation having run “cold” for so long. I believe the market is “ripe for some volatility,” and potentially a market correction, though investors can’t predict the cause right now. Something out there will create turbulence at one point or another.


Inflation is on the rise in Europe, with the CPI figure for the Euro Zone hitting 2 percent. Pressure on the European Central Bank is likely to increase in the near-term. The ECB will stress once again that the inflationary pressures are only temporary, but investors could stay nervous amid speculations about early tapering.

Multiple ECB members have tried to ease investors´ nerves and warned about premature tightening. Therefore, the central bank is unlikely to announce any changes or start the taper talk. The ECB will be looking at the labour market for further clues. While the economic recovery has indeed picked up, the end of short-time work schemes could have a big impact on it later this year.  The dovish ECB should keep European equity markets supported in the short-term, with the GER30 likely to reach new record highs in June. The fact that the European indices are dominated by technology stocks is actually working in their favour at the moment.

After a relatively slow start, vaccination rates in Europe have picked up. Across the major economies, jabs are being provided to around 0.8% of the population per day – in line with the UK. At this pace, the eurozone will soon have provided at least one dose to the over 50s.

The prospects for a strong growth rebound this year have therefore risen and this has helped European equities. The MSCI Europe ex-UK Index rose 2.8% in May – the best performing major equity index. The eurozone PMIs for May were also positive. While manufacturing has been recovering since last year, the rebound in the services sector had been delayed by ongoing restrictions. Vaccinations appear to now be boosting confidence in the services sector, as evidenced by the improvement in the services PMI business survey to a level above 55. The European Union is planning to lift all quarantine rules for those who have been vaccinated, starting July 1, and to introduce digital passports for travellers.

Valuations in EU financial markets for most market segments are now at or above pre-COVID-19 levels. They remain highly sensitive to events and volatility, as shown by the market movements related to Gamestop and the impact that a potentially slow roll-out of vaccines had on equity prices. Volatility is likely to remain at elevated levels in June, as the month will not be lacking in important data releases or events.

United Kingdom

The unlocking of the UK economy continued in May, with indoor hospitality reopening. At the start of May we looked at how a build-up of household savings alongside fiscal stimulus would create a potent cocktail to boost spending. That proved to be the case in the UK, as shown by a 9% month-on-month rise in retail sales for April, with clothing sales growing by an astonishing 70% over the prior month.

While demand has clearly been strong, UK businesses have been struggling to meet that demand in a timely manner. The PMI surveys showed that supply bottlenecks in manufacturing became even more acute in May with supplier delivery times growing. Price pressures facing businesses also grew, with the input price component of the manufacturing business surveys hitting record highs. It should be no surprise then that inflation rose by 0.6% month on month.


Japan has been disappointingly slow with its vaccine roll-out, lagging well behind other developed markets. At the time of writing, only 3.7% of the population has been vaccinated, with only 1.6% having had the double dose needed to secure full immunity. This has left Japan unable to control new waves of the virus without restricting activity and as a result, output dropped in the first quarter. More widespread restrictions announced in recent months will likely cause the economy to contract again, slipping into a technical recession. Consumption should remain lacklustre for the rest of the year as poor immunity rates suggest Covid will be an ongoing problem. Due to the weaker-than-expected first half of the year with little chance of a strong domestic rebound, we are forced to slash our growth expectation for this year from 3.2% to 1.1%.

Sentiment remained weak following the government’s extension of the coronavirus state of emergency in Tokyo, Osaka, and seven other prefectures by three weeks to June 2021. While there are short-term headwinds, Japanese equities could catch up with other developed market equities once they get past the current third wave of Covid-19 infections and once vaccination rates pick up.


China’s economy delivered blockbuster growth of 18.3% y/y in Q1, the fastest pace of expansion in a single quarter on record since data begin in 1992. However, that stellar performance was flattered by powerful base effects and output expanded by only 0.6% in seasonally adjusted, quarter-on-quarter terms. Strong global growth should bolster demand for exports and the recent increase in new orders relative to inventories hints at a burst of manufacturing activity in the near term as a result, economist have nudged up their forecast and now expect GDP to expand by 9.2% this year.

Looking further ahead, though, leading indicators such as the credit impulse and real M1 have continued to decline in recent months consistent with a turn down in the domestic economic cycle in the months ahead. And while we do not anticipate that the People’s Bank will change any of its official monetary policy settings, short-term interest rates are likely to drift higher. We do not expect activity to collapse and a steady recovery in consumption should continue. However, we still expect China’s economy to resume its trend slowdown and have lowered our forecast for GDP growth next year to 5.5%.

The Chinese government’s anti-trust actions targeting internet giants like Alibaba and recently Meituan are a headwind for parts of the market. Additionally, the developing dynamics in U.S.-China relations need to be monitored closely.  As equity market valuations have returned to a reasonable range, the likelihood of another significant correction is now much lower than before. Still, the market may well consolidate for a while further, until it finds new catalysts for clearer directionality.

Emerging markets

Emerging markets (EM) stocks have been marketed in recent times to escape the expensive valuations of US equities. Although the performance of EM stocks has been disappointing over the last decade. However, there are also some structural arguments against emerging markets stocks that investor should consider,

Lack of diversification benefits – Investors should aim to have diversified portfolios, which require uncorrelated instruments and asset classes. However, the global economy has become much more integrated over the last decades. Global stock markets are highly synchronised, making diversification more difficult. The correlation of EM equities was 0.8 to the S&P 500 and 0.6 to US high yield bonds between 2007 and 2021. The correlation decreased during some years, but spiked during crisis periods like March 2020, which unfortunately is when diversification benefits were most needed. Given these high correlations, investors should consider EM stocks more as a replacement for US equities or high yield bonds as it essentially provides similar risk exposures.

EM is a bet on a depreciating dollar – Most emerging markets are dependent on the US dollar, in one way or the other. It might be a country like India that needs to import oil for domestic consumptions, or a country like Argentina that sells its agricultural products in international markets. Almost all commodities are priced in the US dollar and changes in the currency impact these economies. We can demonstrate this relationship by comparing the outperformance of EM to US equities and the inverted US Dollar index. We observe that EM equities outperformed when the US dollar depreciated. It is not a perfect relationship (there are none in finance), but it held broadly in the period between 1990 and 2020.  Given this, investing in EM equities compared to US stocks requires a view on the US dollar. However, investors have a poor track record in speculating on currencies and even if they were skilful at timing FX movements, then it would be far more efficient to directly go long or short the US dollar via futures.


Massive population declines in EM markets – Some emerging market countries have exceptionally poor demographic outlooks. Three markets namely China, Taiwan, and South Korea constitute 67% of the stocks in the MSCI EM index. Each economy is expected to lose approximately 50% of its population until 2100, which is a cumulative 720 million people.  The top 10 countries, representing 93% of the index constituents, are expected to lose 1.1 billion people over the next 80 years. In fact, only two out of these ten countries, South Africa and Mexico, are forecasted to increase their populations, representing only 5% of the index constituents.  It is difficult to fathom the amount of damage these population declines will do to these countries and the global economy. Human civilisation is built on a steadily expanding global population, not a diminishing one. For example, most Chinese invest in property. Half of the residential properties will become permanently unoccupied, resulting in massive wealth destruction. Using a classical framework for reference, it is hard to imagine increases in productivity large enough to overcome this reduction in labour.

A counterargument is that the index composition will change over time, which is naturally true. However, these index changes are slow and most EM countries with better demographic profiles are found in Africa. Unfortunately, that continent has consistently disappointed to generate steady economic growth and evolve into more stable regimes over multiple decades, so investors may be sceptical about it carrying EM indices to new heights.


After a 19% slide from a record near $2,070 per ounce last August to around $1,680 in early March, the gold price has recovered more than half that decline. In afternoon action, the spot gold price advanced 0.4% to $1,899, after rising as high as $1,915 earlier in June. A burst of inflation, easy Federal Reserve policy and less competition from Bitcoin as an inflation-beater have all worked in gold’s favour lately. The near-term bull case for gold is that price pressures have staying power but the Fed doesn’t respond to rising inflation, sinking the dollar. That’s a plausible scenario. Yet any hint that the Federal Reserve is moving closer to tapering asset purchases could halt gold’s momentum.

When interest rates are low, gold often makes sense for those looking for a safe-haven asset because investors can’t get much return from other safe-haven investments, like U.S. Treasuries. The Fed has signalled that it plans to keep interest rates near zero through at least 2023. As a result, gold could continue to hold its appeal for several years to come. Once interest rates creep back up, investing in bonds will make more sense for those seeking returns that can outpace inflation.


The reopening economy has already sent crude up about 40% since the start of the year, but a surge in driving by Americans, as well as an increase in goods transportation and air travel, could pressure prices further. Demand is ramping up very quickly because everybody’s driving, and we have the reopening of Europe, which is really starting to happen, India seems to have hit an inflection point, in terms of cases, which in my mind could mean you also get a return of mobility.

Members of OPEC and their allies, a group known as OPEC+, are gradually returning oil to the market. They agreed to implement their previously planned production increase of 350,000 barrels a day in June and another 450,000 barrels a day starting in July. Saudi Arabia also agreed to step back from its own cuts of about a million barrels a day, which was put in place earlier in the year.  OPEC + does not currently see a threat from the U.S., and it has plenty of spare production capacity to curb higher prices and add supply if it needed to. Previously, higher prices would be an invitation for the U.S. shale industry to pump more, which could in turn drive prices down. I would expect to see Brent hit $80 a barrel and WTI trade between $75 and $80.

Sector 12 Month Forecast Economic and Political Predictions
AUD 0.76c – 0.80c The AUD has been especially volatile against the USD since hitting a three-year high in February 2021. AUD is a cyclical currency that should benefit from the global economic recovery later this year and the favourable interest rate differential with the US. However, tensions with China remain a downside risk, given the importance of China for Australia’s exports.
Gold $1,838 – $2,075


Globally, gold prices hovered near the key level of $1,900 an ounce due to a weaker dollar and lower bond yields.  The speculation that the Federal Reserve may bring forward the timeline for tapering bond purchases, especially after the upbeat US economic data has put downward pressure on gold. MCX gold has dropped and short-term momentum looks to be negative. Gold’s sharp up move in the last few weeks has made it vulnerable to profit taking which may extend further if the US dollar strengthens further.
Commodities WTIS US$70 – US$80


Base metal complex will benefit from easy money policy. Energy is the only undervalued sector.

Commodity prices continued their recovery in the first quarter of 2021 and are expected to remain close to current levels throughout the year, lifted by the global economic rebound and improved growth prospects. Global decarbonisation is good news for the metals sector, with mining being part of the solution rather than a problem due to its emission chain. Examples of metals that we like and are seeking exposure to in our investment strategy are copper, a universal beneficiary of electrification, and select battery raw materials such as nickel and potentially lithium (where supply is more readily increased).
Property This is a market for active stock-pickers. Record-low interest rates present a significant challenge for investors and their advisers seeking a healthy income yield, particularly for those depending on income from investments in retirement. With interest rates expected to remain “lower for longer”, Australian Real Estate Investment Trusts are well placed to generate reliable levels of income, with the potential for capital growth.
Australian Equities 6880 – 7650


This is a market for active stock-pickers.

Share prices are higher than “fair value”. The market’s price/earnings multiple (as a measure of how stock prices compare to the profits companies are making) is currently sitting at roughly 19 times. That is historically high.
Bonds 1.5% – 2.5%

Short duration warranted.

An inflation-linked bond fund might be a good addition if looking for more inflation protection.

The COVID-19 vaccine’s global rollout has coincided with rising bond yields, as investors anticipate higher inflation on the back of the expected post-pandemic recovery. The Australian 10-year bond rate will top 2 per cent by the end of the year, as the resolve of central banks to support their economies will come under more intense pressure.
Cash Rates On Hold Cash & bank deposits are likely to provide very poor returns, given the ultra-low cash rate of just 0.10%.
Global Markets
America S&P 500 3900 – 4300


Second quarter is likely the peak growth rate for both the economy and corporate earnings, with positive economic surprises waning. Inflation remains the key issue for the market, and inflation jitters are likely to keep the S&P 500 in a tight range until early July.
Europe European Index


After a slow start, the vaccine rollout is gaining pace and Europe should be on track for economic reopening by Q3. The post-lockdown recovery is likely to be extremely strong and GDP should bounce back by around 5% this year following last year’s near 7% decline. Europe’s exposure to financials and cyclically sensitive sectors such as industrials, materials and energy, and its small exposure to technology, give it the potential to outperform in the post-vaccine phase of the recovery when economic activity picks up and yield curves in Europe steepen.
Japan Hold The overall monetary policy framework is likely to be maintained for the time being. The central bank expects negative interest rates to be cut further only in emergencies, such as a sharp rise in the yen. Financial support measures for companies will expire in September 21, but financial conditions for accommodations, restaurants and other services remain tight. If the situation continues, the measures are likely to be extended.
Emerging markets Hold

Prefer Asia Emerging markets

Reports about COVID flare-ups and new lockdowns raise legitimate concerns about the near-term growth outlook in emerging markets. EM equities overall have been range bound over the past 13 years. Only recently has the MSCI Emerging Markets Index recovered to its peak levels in 2007. From a valuation perspective, emerging markets equities offer compelling valuations trading at 17.2 times the trailing price-to-earnings (P/E) ratio as compared with the MSCI All Country World Index (ACWI) at 24.5x.
China Accumulate Chinese stocks could struggle in the second quarter, as policymakers seek to rein in risky lending and the economic recovery from coronavirus accelerates elsewhere in the world. Beijing’s focus had shifted to normalising monetary policy after cutting interest rates during the health crisis, which could sap liquidity from markets in Shanghai and Shenzhen. Regulators’ recent crackdown on fintech and ecommerce companies such as Jack Ma’s Ant Group and Alibaba had also weighed on investor sentiment.



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