Macro Matters – March 2021

(Source: Merlea Macro Matters)


Three months into the new year, it is fair to say that the global economic outlook certainly seems more stable than it was last March amid the COVID-19 pandemic. Vaccines are gradually being made available around the world, central banks have brought stability and liquidity to global markets, and governments worldwide have introduced some of the largest fiscal stimulus packages in modern history. In advanced economies, additional government spending and tax cuts during the COVID-19 crisis have averaged nearly 13 per cent of gross domestic product, with loans and guarantees amounting to another 12 per cent of GDP.

By contrast, government spending increases and tax cuts in emerging economies have totalled about 4 per cent of GDP, and loans and guarantees another 3 per cent. For low-income countries, the comparable numbers are 1.5 per cent of GDP in direct fiscal support and almost nothing in guarantees. In the run-up to the 2008 global financial crisis, emerging economies had relatively strong balance sheets compared with developed countries. But they entered this crisis burdened with far more private and public debt and are thus much more vulnerable.

Massive central bank balance sheet expansion and the surge in government debt/deficit will likely encourage investors to venture further into alternative asset classes. While it’s likely that investors will increasingly focus on traditional alternative assets such as private assets, emerging markets, and infrastructure and agriculture funds, we believe there’ll also be a growing demand for assets whose value cannot be distorted by central bank purchases, specifically those that may be subject to less regulation and taxation, since governments may be seeking additional revenue to fund expected future deficits. Against this backdrop, cryptocurrencies will likely be viewed as an alternative investment that offers a solution to investor fears that ongoing extraordinary policy support could lead to resource misallocation. This doesn’t necessarily imply that investments in cryptocurrencies are appropriate, but it does suggest that crypto-assets such as bitcoin will increasingly become a standard point of reference for investors and policymakers alike.

Ultra-low interest-rate policies across the world are helping to prevent long-term scarring, but many larger companies, including big tech firms, do not need the support that is driving their stock prices through the roof. This is inevitably fuelling populist anger (a small taste of which was evident in some US politicians’ reactions to the recent GameStop stock-price war).

The International Monetary Fund forecasts that the United States and Japan will not return to pre-pandemic output levels until the second half of this year. The Eurozone and the United Kingdom, again declining, won’t reach that point until well into 2022.The Chinese economy is in a league of its own, and is expected to be 10 per cent larger by the end of 2021 than it was at the end of 2019.

The strength of the global economic recovery depends on the speed at which COVID-19 vaccines can be distributed, the scope for further fiscal spending depends on the outcome of delicate political negotiations in each country, while the resilience that we’re seeing in the financial markets may be limited by when investors believe central banks might start to roll back quantitative easing (QE). Inflation may be stubbornly low for now, but a big enough blast of demand could push it higher, leading the Fed to raise rates somewhat sooner than it currently plans. The ripple effects of such a move on asset markets would separate the strong from the weak, and hit emerging markets particularly hard.

At the same time, policymakers, even in the US, will eventually have to allow bankruptcies to pick up and restructuring to take place. A rising tide of recovery is inevitable, but it will not lift all boats


There has been a marked change in sentiment in financial markets recently. The change has emanated from the bond market, specifically the US Treasury market, where yields have risen substantially. But the surge in yields has been global. Government bond yields – which move in the opposite direction to prices in a reflection of the risks to debt investors – have been rising around the world in recent weeks amid fears that heightened government spending, economic support from central banks, and a rapid recovery from Covid-19 will give way to rising inflation. Such a shift could require higher interest rates from central banks, making access to cheap borrowing tougher for companies and households.

Unfortunately for bond investors, the actual level of interest rates is still quite low by historical standards. That means that if you buy Treasury notes or bonds of any maturity at current yields, you are likely locking in returns that will lag the rate of inflation. The bottom line is that investment-grade bonds do not look attractive for 2021, particularly Treasuries. If your investment objectives require you to hold investment-grade bonds, look for shorter duration (five years or less) and look for the lower end of the investment-grade universe (BBB or Baa), where spreads to Treasuries are still decent. High-yield corporate and floating rate bonds look reasonably attractive. There are no bargains in today’s bond markets, but high-yield and floating rate corporate bonds are likely to be your best bets for the remainder of this year.

The story of the markets nowadays would be the conflict between the recovery/liquidity narrative and the inflation/higher rates narrative. The strong recovery boosted by continued loose liquidity from central banks is good for risk assets, but higher inflation that results in higher yields is bad. The tug-of-war as one day one narrative dominates and the next day the other is likely to keep markets volatile.

Despite a climbing 10-year Treasury yield, the 10-year Treasury Inflation-Protected Securities (TIPS) yield declined over December 2020 and into January 2021. The difference between the two, called the breakeven rate, reflects implied inflation expectations over the next 10 years. The breakeven rate generally has been held below 2% since October 2014, except for 2018 when it ran closer to 2.1% for much of the year. With the Fed allowing inflation to run a little hot, the breakeven inflation rate may widen a little more from current levels, but at some point, growth expectations should lift the TIPS rate as well, helping to keep the breakeven rate near current levels.

Economic growth is, of course, to be hoped for, not feared, as the world climbs back out of pandemic-inspired recessions. Some level of inflation is also desirable – central banks have been trying to rekindle it, without success, since the financial crisis in 2008 to promote higher levels of investment, spending and growth. Although central bankers have been relatively sanguine recently about the higher yields, I would expect them to step in with at least verbal intervention if the rise in yields risks choking off the recovery prematurely.

Listed Property

Australian real estate investment trusts (A-REITS) are likely to perform strongly in 2021 – especially those that are trading at attractive discounts, but own quality income-earning assets. The outlook is undoubtedly brightening, though, as vaccination programs get under way, and a gradual return to economic normality. Inevitably, though, it will take some time for vaccines to roll out and take effect and —crucially for sentiment — for their positive outcomes to become clear. With market interest rates now at an effective lower bound, capital values in coming years are set to be determined not by yield movements as they were in the past two cycles but by fundamentals — namely, in maintaining and growing income receipts.

Inevitably, reduced yield compression implies a lower returns environment. Assets that offer structural growth potential, along with equity and debt investments backed by secure income streams, are set to remain prominent and further expand their share of investment activity.

Offshore investors will continue to be attracted to Australian commercial property assets, given the attractive yields on offer. A recent survey from commercial real estate firm, Jones Lang LaSalle, suggests that half the investors surveyed plan to increase their exposure to Australia. Australia is seen as a relative COVID safe-haven, with comparatively favourable demographic drivers and a stable regulatory and political environment that sits on the doorstep to Asia Pacific.

The news of an effective vaccine, the easing of restrictions and the rent collection near pre-COVID-19 levels provided a better level of certainty. During the midst of the pandemic in March and April, regional shopping centres owners Scentre Group and Vicinity have traded at approximately 65 per cent discount to Net Tangible Assets (NTA), as at mid-January 2021, Scentre Group and Vicinity traded between 20 per cent to 30 per cent discount to NTA.  In comparison, convenience retail REITs such as Charter Hall Retail and SCA Property Group traded at 10%-20% discount to NTA at the lowest point and have now recovered to theirpre-COVID-19 share price level. BWP Trust, the largest owner of Bunnings Warehouse sites in Australia, consistently traded at a premium to NTA throughout the year. This further highlights the resilience of convenience retail, positive sentiment, and investor demand for the sub-sector.

Although there is limited evidence at this stage, we expect that there will be two-tiered demand in the retail market emerging throughout the new year. Centres which are underpinned by strong non-discretionary retailers or have a unique and strong offering and limited vacancy are likely to remain in high demand from investors. There is scope for this type of centre to see yield compression and limited impact on value due to the weight of capital chasing these assets. Centres which have vacancy, short lease terms or are on hold over without value-add opportunities are expected to remain challenged in the current market and this will be reflected in both the value and yields for these assets.

As a cyclical economy, Australia is also likely to create some recovery-driven opportunities. Among major sectors, office has experienced a sharp correction in the near term, while the short-term impact of COVID-19 is set to weaken demand across all markets, office demand in Sydney and Melbourne will likely resume as the economy rebounds after the downturn. With a trend growth of around 2.5 to 3.0% per annum, the Australian economy is among the fastest-growing economies in the developed world. The strong economic fundamentals underpin favourable rental growth prospects for the Sydney and Melbourne markets in the longer term.

Given REITs have a strong income focus, in a world where the ‘lower for longer’ interest rates scenario has extended out to hitherto unforeseen levels, the merit of real estate remains intact. Post this crisis, we believe the demand for income generating assets will continue, if not actually increase.


There is a clear risk that businesses will stand down staff when JobKeeper expires. Indeed, we expect some retrenchments when the program ends, but overall we do not expect the expiry of JobKeeper to have a major impact on the labour market provided COVID-19 doesn’t resurface and cause lockdowns or major restrictions that limit the capacity of businesses to sell goods and services. The improved economic outlook and rising yields should fuel the rotation into cyclical and value-orientated sectors. Meanwhile, the improving economic outlook is supportive of corporate earnings and the relatively high equity market valuations. Not all sectors will perform the same, however, and the more growth-oriented sectors may find themselves under pressure as bond yields, and therefore the discount rate applied to future earnings, rises.

RBA Governor Lowe has reiterated his ultra-dovish stance. First, the RBA’s response function has now changed from what the bond market appears to be expecting – it will not raise interest rates until inflation is sustainably in the 2-3% range and to get this will require at least 3% wages growth which with NAIRU now possibly being below 4% means the labour market needs to be a lot tighter – all of which will take time (NAIRU stands for “non-accelerating inflation rate of unemployment”). Wage growth has not been above 3% for eight years. Hence the constant RBA reference to not expecting to raise rates until at least 2024. Second, do not expect the RBA to hike rates just because the housing market is hot – with CoreLogic daily data now showing Sydney and 5 Capital City Average prices now surpassing their 2017 record high. The RBA does not target house prices (and nor should it) and will use macro prudential controls to control lending if it looks like lending standards are getting too lax. In our view, this is likely from later this year and could include a return to speed limits on investor loan growth and limits around loan to value ratios, debt to income ratios and interest servicing to income. The best ways to make Australian housing more affordable are to limit the return of immigration to enable housing oversupply to build up and to reinforce the pandemic in encouraging people to relocate from expensive inner-city areas to more affordable suburbs, cities, and regional centres.

The Australian earnings season was strong in aggregate but could not offset the rise in yields and broader investors’ worries. The rise in yields weighed on the long duration technology sector. However, the earnings outlook for Australian equities remains robust and the return of corporate guidance has bolstered earnings expectations. Meanwhile, dividends payouts surprised to the upside given investors a much-needed jolt of income.

The current market enthusiasm can be summed up by optimism that COVID vaccines will save the day — as well as two acronyms.  One of them is FOMO (Fear Of Missing Out), since a lot of people had noticed their friends making easy a lot of easy money from the flood of cheap money in the market. The other is TINA (There Is No Alternative). With interest rates at record lows, many investors feel there is no point holding their cash in savings accounts — so they may as well punt on the share market for any chance of earning a return.

Since its pandemic-trough on March 23, the Australian market has rebounded sharply by 49 per cent (from its low point of 4,546 points).  Despite the recent volatility, there are some decent opportunities for investors.  Things have been difficult for retail, but there are positive signs, utilities had underperformed the market by around 30 per cent and consumer staples are the cheapest pricing they have been in a decade and are good value. There are two main risks that the market has either discounted or is paying no attention to. The first is the risk of the coronavirus mutating, which could make existing vaccines not as effective. Second there a chance that economies might “overheat”, triggering faster rate hikes and a stock market correction.

Global markets

It will take most of 2021 and into 2022 for the full benefits of vaccination to be felt, and maybe even longer in poorer countries. The OECD recently reported, “prospects have improved over recent months with signs of a rebound in goods trade and industrial production… Global GDP growth is now projected to be 5.6% this year… world output is expected to reach pre-pandemic levels by mid-2021.” The greatest vaccination relative to population has occurred in the U.K. and the U.S. China has a low vaccination rate that is not as worrisome as it may seem because their count of new cases is very low. Although Chinese data is not totally trustworthy, even with substantial misreporting the country is in good shape.

Widespread expectations for a global rebound are illustrated by commodity prices. In general, metals and petroleum can experience much faster demand changes than supply changes. So, when demand surges, prices rise sharply. Ocean shipping has surged, with delays for ships trying to unload containers in Los Angeles/Long Beach, Oakland and Savannah. Shipping costs are four times higher than a year ago. Part of the shipping delays, though, come from social distancing among dock workers, which is not a sign of economic strength. In another indication of the improving global economy, interest rates are rising around the world, though not be as much as the U.S. experienced. The global demand for credit tends to rise with the economy, more than the global supply of savings. Thus, interest rates tend to rise when the economy is strong or expected to be strong soon.


The $1.9tn Biden stimulus package — which will add 9 per cent of national income to US spending power — is designed to boost the US recovery. The Biden package is massive. It puts up to $1,400 into the pockets of low-paid workers and members of their families. It extends a wide range of welfare payments into the autumn, boosts parental tax credits, and maintains special unemployment reliefs and health care subsidies. Much of the support is unconditional. The poorest fifth of US households will see their incomes rise by 20%. Child poverty may be cut in half. America is set to be the only one of its members states whose economy will be larger at the end of 2022 than the OECD was predicting before the pandemic. The US is expected to grow faster even than China, which has not happened for years.

But it also promises to propel the global economy towards its pre-pandemic path, through increased US demand for goods such as Chinese-made trainers, French wine, and car parts from Mexico.  With activities such as eating out and entertainment curtailed across the country, much of that extra cash is likely to be spent on consumer goods made outside the US.  US retail sales figures showed that the cheques paid out under the final part of former president Donald Trump’s stimulus raised monthly spending by 7.6 per cent in January. Translated into exports, the contrast from the early days of the pandemic is stark. With the US and Chinese economies likely to run hot, the rest of the world will follow.

There may be optimism among investors about the economy improving, but the reality is that many Americans continue to struggle. More than 10 million people were unemployed as of January, and thousands of businesses have been forced to shutter. For example, more than 110,000 restaurants nationwide were closed either temporarily or permanently as of December, and the industry finished 2020 with 2.5 million fewer jobs, according to estimates by the National Restaurant Association. The disparities of the so-called K-shaped recovery, in which some people are doing well while others are struggling, may be increasingly difficult to ignore. There is an eviction crisis brewing, as renters owe $57 billion in unpaid rent, according to Moody’s Analytics. Even though the housing market has otherwise been “crazy strong,” the pandemic-era problems are still here.

A rotation that has been underway in the market for months, with investors favouring cyclical and value stocks, is likely to continue. And sectors like financials, energy, industrials, and materials could outperform the broader market.  Wall Street’s big rally actually had two distinct stages. Early on, Big Tech stocks and winners of the suddenly stay-at-home economy pulled the market higher. Amazon benefited as people shopped more online, Apple hoovered up sales as more people worked from home and Zoom Video Communications surged as students and adults started meeting online. Tech stocks as a group are the market’s biggest by value, so their gains helped make up for weakness across other sectors as the economy continued to struggle.

Since last autumn, though, excitement for an economic lift-off has caused a more widespread upturn. Banks, energy producers and smaller companies whose profits would be the biggest beneficiaries of a stronger economy have led the way, as coronavirus vaccines roll out and Washington delivers even more financial aid. Those gains are also picking up the slack for technology stocks, which have lost momentum as interest rates rise on worries about higher inflation. A potential signal of too much greed and not enough fear: Investors are so hungry for the next big thing that they’re pouring billions of dollars into investments, before they even know what the money could go toward. These investments are called special-purpose acquisition companies, though they’re better known by their acronym, SPACs. Armed with cash raised from investors, SPACs look for privately held companies to buy so that the company can easily list its stock on an exchange.  Last year, SPACs raised $83.4 billion, more than six times the prior year. They’ve already surpassed that level in less than three months this year.


Just as the pandemic’s initial hit was very uneven across Europe, so will be the member states’ recovery paths. More than half of the member states are forecast to close the distance to their pre-crisis output levels by the end of 2021. Others, however, are expected to take longer. Many factors contribute to such outcome. The economic structure, the share of the tourism sector, and the size of policy responses are among them. Yet, the road out of the crisis still critically depends on the pandemic’s evolution as well as the stringency and duration of measures needed to contain it. The longer the crisis protracts, the greater the risk of large cross-country divergences becoming entrenched, especially if policy responses do not address them adequately.

Several European countries are extending or reintroducing lockdown measures as a third wave of the pandemic sweeps the continent fuelled by more contagious new variants of coronavirus such as the B117 mutation first detected in the UK. The variant first found in Britain is spreading significantly in at least 27 European countries and is now dominant in Denmark, Italy, Ireland, Germany, France, the Netherlands, Spain and Portugal, according to the World Health Organization. European Stock markets have been lagging. Worsening infection rates are raising worries of a “third wave” on the continent and are forcing governments to bring back some restrictions on daily life. But the hope is that the continued rollout of vaccines will get economies and trade back to normal across the world.

European officials often come under criticism for not providing similar fiscal power to the United States. The 27 European nations, for example, agreed in July 2020 to implement a 750 billion euro ($895 billion) joint stimulus, but those funds have not yet been distributed. The economic performance will depend on the evolution of the pandemic, including new variants; as well as the vaccination rollout, which has been difficult for the EU so far. In this context, whether at the national or European level, It has been suggested that member states might soon be discussing how to provide more help for their populations.

United Kingdom

The rapid roll-out of the vaccine is expected to facilitate relatively strong growth from Q2 onwards, with Brexit-related trade frictions expected to ease from the second half of this year. Government intervention and in particular the Job Retention Scheme, should help to keep unemployment relatively low considering the scale of the negative shock to the economy. The pace of inflation is expected to accelerate this year as the gradual economic recovery, rising oil prices and the phased expiration of temporary VAT cuts for hospitality businesses add to a more inflationary mix. The impact of Brexit on supply chains is also likely to push up consumer prices. However, inflation is expected to remain below the Bank of England’s 2% target by next year, allowing for a longer period of low interest rates to support the economic recovery.

The pandemic has resulted in a sharp rise in household saving, as the lockdowns and on-going social restrictions have prevented spending on a range of services and activities This may signal a significant rise in consumer spending once restrictions are lifted, although survey evidence shows that the majority of additional savings is concentrated in higher income bracket households who are planning to use most of the extra money to reduce debt or to make a range of investments.


Japan opted for a longer vaccine approval period, however, with the Pfizer vaccine receiving authorization on 14th February, the vaccination roll-out program is ongoing with priority being given to medical workers and older residents after March.

This positivity is somewhat tempered by the ongoing uncertainty surrounding the 2021 Olympic Games which are set to take place later this year after being postponed last year. Japan’s economy is set to benefit from a stronger recovery in external demand, particularly as the Chinese economy grows more steadily and the recovery across other advanced economies potentially boosts growth in exports. However, weak domestic demand could contribute to a slow pace of inflation which was already at low levels before the start of the pandemic.

So far it looks like this year could be another year of no change in consumer prices after monthly inflation turned sharply negative at the end of 2020 owing to the direct and indirect effects of the pandemic. The impact of the “Go to Travel” campaign which provides a discount on domestic travel is likely to remain a factor in lowering the headline rate of inflation. The campaign has been suspended due to the ongoing state on emergency, but once reinstated it could exert a drag on inflation later this year.

Recovering Business Outlook in 2021

As elsewhere across the more advanced economies, policy has played a major role in supporting the Japanese economy with low interest rates and high levels of fiscal spending. While Japan’s overall government debt, representing about 266% of GDP, is exceptional across large, advanced economies, low borrowing rates and high levels of domestic saving may allow for further stimulus packages to be launched later in the recovery.


With the pandemic now under control and quarantine measures gradually being lifted, consumption is recovering and we expect it to contribute more to China’s economic recovery this year. With the global economy recovering from the pandemic, demand for Chinese exports have remained robust. The distribution of vaccines across the globe has been uneven and production in many emerging markets has yet to reach full capacity. These factors should support China’s exports in the months ahead.

The initial draft of China’s 14th Five-Year-Plan was circulated at the end of October 2020, with key aspects of the new plan including a push towards technological self-reliance, ‘dual circulation’ and a move to a sustainable and resilient economy. The clear message of the new plan is to reduce reliance on other countries and focus on innovation, targeting areas like 5G, ‘internet of things’ and cloud computing.

China has already experienced a partial decoupling with many strategic export markets over the past year or so.  The US placed restrictions on the exports of high-tech products to China and direct investments to and from China. The UK, Australia, and several EU countries have blocked Huawei from having either a comprehensive or partial role in the development of their 5G networks. India has had a military skirmish with China at the Himalayan border, with the Indian government applying investment restrictions. Also, various countries and regions, including the EU and US, have sought to onshore/re-shore manufacturing activities associated with critical medical equipment and PPE where Chinese production was previously relied upon pre-pandemic.

Compared to other major economies, the Chinese government was relatively restrained in adopting large fiscal and monetary stimulus policies to help boost the economy. Nonetheless, Beijing is still expected to pull back some of the stimulus measures to control rising debt levels and prevent asset price inflation.

We expect China’s overall economy to continue to recover and grow by 8.8% in 2021. Stability of the labour market has been a top priority for the Chinese government in recent years. To support the labour market amid the pandemic, the government has taken various measures including expanding higher education enrolment and reducing social security contributions by companies.

South China Sea

China appears to be accelerating its campaign to control the South China Sea and the Senkaku Islands in the East China Sea. China’s ongoing militarisation of many artificial features in disputed waters is well known. A less well known, but highly consequential implication of this militarisation is the vastly increased capacity it gives China to project power not only to control the reefs and rocks of the South China Sea, but, in the future, to assert control over the high seas and airspace above it. A military conflict in the South China Sea would force most shipping from Europe, the Middle East and Africa destined for Asia and the US west coast to be diverted around the south of Australia. The additional shipping cost would bring reductions in economic activity around the world, but with dire effects on countries at the epicentre. The countries most exposed to economic loss from a regional maritime conflict are already spending more on their militaries. About 80% of global trade is carried by sea and estimates of the volume carried through the South China Sea range from 20% to 33%.



Since peaking in August 2020, gold has lost momentum and has shown no willingness of retesting its highs.  The weakness goes against what many investors had expected to happen. Gold entered the new year with a major catalyst for growth. The higher gold price prediction was based on President Joe Biden’s massive $1.9 trillion stimulus package that by default bodes well for the metal.

So, what can we expect in the coming weeks and months? Will gold prices go up or will the sluggish trading activity continue?  There is no mistaking the fact that gold prices historically perform well during periods of inflation. Gold and other metals like silver ended 2020 with their strongest gains in a decade – and for good reason. Some of the more notable factors that supported a higher gold price forecast include the weakening US dollar, continued uncertainty created by the Covid-19 pandemic, and expectations for rising rates.

None of these catalysts have abated since the start of 2021. Quite the contrary is true as all the factors that supported a higher gold price change remained in place. It would be reasonable to conclude that the trading action seen in 2020 has not come to an end and 2021 could see new highs.

The reasons to hold gold – if inflation is coming (and it probably is) you want to hold a real asset that can hedge against it – one that can’t be inflated away by relentless money creation and currency debasement. That’s particularly the case in an era of very low interest rates.


Commodity prices have surged worldwide over the last few months on the back of governments’ pandemic-related stimulus policies and supply constraints. Prices for industrial metals, such as iron ore and copper, have reached multiyear highs, owing to strong demand from China and supply bottlenecks. Oil prices have also staged an impressive comeback, with the price for Brent crude returning to pre-pandemic levels (see chart below).

The concentration of power over the next couple of years, with Democrats controlling all three branches of government, will make increases in U.S. production very unlikely. From recent 2020 highs where the U.S. produced over 13 mm BOPD, production in response to low prices has fallen to 11.0 mm BOPD. We will see an enhanced and stricter regulatory environment in the coming years. The U.S. will be put firmly on a path where renewable fuels are increased at the expense of petroleum-based fuels. The anticipated re-entry of the U.S. into the Paris climate accords will only exacerbate this trend. Fossil fuels will become scarcer, and that is bullish for prices. The decline of U.S. supplies will return pricing power firmly to OPEC+, which really has only one mission-providing the maximum return for its members by balancing supply and demand. The western economies’ current infatuation with climate change, is less of a motivator for the key countries that make up OPEC+. Their economies are driven primarily by the export of crude oil, and they all want higher prices.

Sector 12 Month Forecast Economic and political predictions 2021



An easing of sentiment has meant that the currency has lost some of its upside impetus.

72 -80c


At a very basic level there’s a big range in which the Australian dollar could move depending on the price of iron ore, Australian interest rates relative to those overseas, levels of economic growth at home and abroad, and rises and falls in the US dollar.


China will begin to slow in H2 as falling credit growth comes to bear.





$US1720-/oz- $US2200/oz


I expect demand for gold to continue given low real yields, medium-term inflation expectations and central bank QE programs, even if it has paused for now.

The main culprit has been the rising U.S. 10-year Treasury yield, which has triggered a stronger U.S. dollar that is weighing on gold. There are massive amounts of debt, concerns about currency devaluation, and the government has no choice but to monetize all that paper. US will have inflation. And once the market gets tuned to that, long positions will return into gold.I am still positive on gold in the medium-term, adding that the fiscal stimulus is not going away any time soon with the Fed not planning to reverse policy until 2022.





The rally in crude looks far from over, with the underlying fundamentals supporting more gains this year. Oil balances tighten heading into Q3 with a seasonal summer demand boost, higher refinery runs, and an improving outlook for the COVID situation amidst ongoing vaccinations.


Preferred sector Oil and Gas.


Already this year, several markets have witnessed considerable bullish sentiment, prompting many analysts to project a brighter future for commodities as the world strives to put the impact of COVID-19 behind it once and for all. Of particular interest with this rally has been the weakness of the US dollar, which is the de facto currency used to price virtually every global commodities market. A weak dollar means commodities are cheaper for global buyers when converted back into their domestic currencies and, as such, will induce greater demand, all else being equal.









The dividend yield of the S&P/ASX 200 A-REIT index, at 4.1%, remains attractive relative to the 10-year bond yield at 1.7.




Although the longer-term impact of COVID-19, once populations are inoculated, remains subject to debate, the very low cost of capital is not. Offshore investors will continue to be attracted to Australian commercial property assets, given the attractive yields on offer. Australia is seen as a relative COVID safe-haven, with comparatively favourable demographic drivers and a stable regulatory and political environment that sits on the doorstep to Asia Pacific.



Australian Equities


Expect a short-term pull-back




Begin to rotate healthcare, consumer staples, utilities and sell high PE tech stocks.



Share markets have been volatile in recent weeks as long-term bond yields increased and investors feared inflation would force interest rates up. I do feel we are reaching an inflection point but not because the market is high, but because the market needs the economic data to start supporting the underlying story.






We prefer inflation-linked bonds as we see risks of higher inflation in the medium term. We are underweight duration on a tactical basis as we anticipate gradual increases in nominal yields supported by the economic restart.



While short-term rates are anchored at ultra-low levels, long-term bond yields are more sensitive to changes in the macroeconomic backdrop, and they have been moving higher. Rising inflation expectations and the prospect of better economic growth pushed yields gradually higher since their early 2020 lows and that trend accelerated in early 2021.





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



Stand Aside


Elevated stock and bond valuations. Corporate and government debt at high levels.

U.S. dollar weakness continues.


U.S. large caps have led the rapid recovery in financial markets and now appear fully valued – particularly secular growth stocks that are highly sensitive to interest rates. There is potential for large-cap cyclical and value stocks to perform well even if the large-cap indices remain flat or decline.








Preferred countries UK & Germany


Equity valuations remain attractive to the U.S. Stronger long-term Euro outlook.  Monetary and fiscal policy remain accommodative.



After months of negotiations, Europe has finally agreed on a EUR750 billion pandemic relief package, but the funds are unlikely to flow into the economy before their summer. 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 postvaccine phase of the recovery when economic activity picks up and yield curves steepen.

Maintain higher exposure to more cyclically oriented sectors that should benefit from economic recovery.







Overall, we anticipate the Japanese market will perform in line with corporate profits, which we believe could surprise on the upside in the second half of the fiscal year.



While local PMIs have recovered, similar statistics on consumer demand have remained weak. However, this weakness is also part of a longer-term trend. It has been 30 years since consumption peaked in Japan, and despite a few glimmers of improvement, Japanese consumers have remained reluctant to go on a buying spree.






There is a risk of a market consolidation but given the very strong top-down outlook and longer-term positives, this should provide opportunities among sustainable high growth businesses.


We expect slower credit growth, less government bond issuance, and a reduction in the fiscal deficit. The question is no longer whether and when the People’s Bank of China will normalise monetary policy—it’s the pace and magnitude of normalisation.  The Chinese government’s plan for a slowdown in the growth of infrastructure spending appears to be an acknowledgment that such investment has been too large a source of economic growth in recent years and that the economy needs to be more driven by consumer demand.




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