Macro Matters October 2021

(Source: Merlea Macro Matters)


September is historically the weakest month of the year, with the S&P 500 posting average declines of 1% during the month going back to 1928, according to Yardeni Research. Expect some volatility, or at the least some shift in asset allocation between growth and value stocks as professional investors try to predict the Fed’s next steps and what corporations will forecast about 2022 during earnings season. Volatility has been average recently, so the eventual return of bigger daily swings up or down—be it in September or later—are likely to feel more pronounced. The trifecta of Covid, inflation and Fed policy—which have been the dominant themes in the market for months—are likely to continue.

The re-opening of the world economy continues, and economic activity has picked up substantially. However, the strength of the rebound in demand has caught firms by surprise and supply chains are stretched with the consequence that inflation has picked up.  While I still expect a robust recovery in the world economy, the initial acceleration stage of the recovery is over, and we are in a new phase where supply constraints are having a major impact on the cycle.

Signs of a peak in global growth can be seen in business surveys with the Purchasing Managers indices (PMIs) rolling over, first in the emerging markets (EM) and then in the developed economies (DM). The recent weakness in industrial metals, particularly copper prices, is consistent with a slowdown in industrial activity. Indeed, activity in commodity-intensive China disappointed in July. The increasing spread of the delta variant is being blamed for the slowdown and is becoming more of a drag on activity particularly in Asia.

Delta is exacerbating the principal headwind facing the world economy. That is, a shortage of capacity where firms have run into bottlenecks and have had to ease back production for a lack of components, particularly semi-conductor chips. Order levels are high, but backlogs and delivery times are at record levels. The result has been an increase in prices as buyers chases scarce supplies. Production is also being constrained by a lack of labour. This is occurring at a time when unemployment rates are well above average, but the speed of re-opening combined with a lack of forthcoming applicants means many vacancies are going unfilled.

The upturn in the global manufacturing sector lost further momentum during August, as rates of output growth decelerated in several major markets including the US and euro area and slipped into contraction (on average) in Asia.

Economies such as the UK which have depended on the flow of labour from overseas have been particularly badly hit with work visas down by more than a third in the year ending March 2021.  More generally, worker shortages have been attributed to a reluctance to increase social contact, waiting for face-to-face teaching to restart rather than make childcare arrangements. More vaccinations should also help ease fears of the virus, but many inoculation programmes are losing momentum as they encounter greater vaccine hesitancy.  One of the key variables to watch is the participation rate, the percentage of the population aged over 16 who are working or actively looking for work, a broad measure of worker availability. In the US the ratio collapsed as the pandemic hit and only staged a brief pick-up as the economy re-opened. At 61.7% it languishes well below its pre-Covid level.

The rising risk of stagflation

Stagflation is defined as the combination of sustained high inflation and prolonged stagnant economic growth, which leads to persistent erosion in the real value of asset owner portfolios.

Today, there is a real risk that we will return to the stagflation of the past but for a different reason than in the 1970s. This time around it might be the result of excessively loose budget and monetary policies combined with continued supply disruptions both here and abroad. Those supply disruptions might intensify because of the spread of the Delta COVID-19 variant that is already wreaking havoc in several countries.

The main risk that today’s inflation will prove to be anything but transitory stems from the unusually easy stance of budget and monetary policy. It also stems from the likely release of the considerable amount of pent-up demand that was built up during the pandemic’s lockdown phase.

What’s prompting concerns about stagflation now?

The warning signs are already apparent in today’s high price-to-earnings ratios, low equity risk premia, inflated housing and tech assets, and the irrational exuberance surrounding special purpose acquisition companies, the crypto sector, high-yield corporate debt, collateralised loan obligations, private equity, meme stocks, and runaway retail day trading. At some point, this boom will culminate in a Minsky moment (a sudden loss of confidence), and tighter monetary policies will trigger a market readjustment.

The current mix of persistently loose monetary, credit, and fiscal policies will excessively stimulate aggregate demand and lead to inflationary overheating. Compounding the problem, medium-term negative supply shocks will reduce potential growth and increase production costs. Combined, these demand and supply dynamics could lead to 1970s-style stagflation (rising inflation amid a recession) and eventually even to a severe debt crisis. Now one can make a case that “mild” stagflation is already underway. Inflation is rising in the United States and many advanced economies, and growth is slowing sharply, despite massive monetary, credit, and fiscal stimulus. For now, loose monetary and fiscal policies will continue to fuel asset and credit bubbles.

There is now a consensus that the growth slowdown in the US, China, Europe, and other major economies is the result of supply bottlenecks in labour and goods markets. The optimistic view from Wall Street analysts and policymakers is that this mild stagflation will be temporary, lasting only if the supply bottlenecks do. Bond yields have fallen in the last few months and the recent equity-market correction has been modest so far, perhaps reflecting hopes that the mild stagflation will prove temporary.

What may happen if inflation is not transitory, and persists for some time?

If inflation runs too hot, or gets too high, the Central Bank may be forced to intervene and raise interest rates, which tends to have the effect of slowing growth. But Central Banks have not exactly been trigger happy when it comes to rate rises. The last rate rise from Australia’s Central Bank, the RBA, was in 2010 and the last time the US Fed Raised rates was in 2017, when Janet Yellen was Fed Chair.

What may happen if global growth is too slow?

This is the other symptom of stagflation; a slow-growing global economy. Central Banks globally have regularly turned to lowering interest rates to attempt to fuel economic growth. But interest rates globally are already close to zero or even below zero in many parts of the world, meaning this is less of an option when it comes to fuelling growth in this economic cycle. And few Central Banks like the idea of setting negative interest rates.

Another choice Central Banks have is to print money and push that through the economy, such as what has been happening with the global Quantitative Easing (QE) programs. But this can also spark inflation, and the US Fed is talking about switching off this policy lever, having already printed more than $2 Trillion as part of QE since COVID began.

Under these conditions, central banks will be damned if they do and damned if they don’t,


While Covid-related uncertainty remains, Powell indicated that the central bank could begin buying fewer bonds, what’s known as tapering, by the end of the year. The Fed’s motivation for tapering is to slowly remove the monetary stimulus it has been providing the economy. Specifically, according to guidance the Fed issued in December, tapering will begin when the economy has made “substantial further progress” toward its goals.

Some members of the Fed’s policy setting committee, the Federal Open Market Committee (FOMC), have noted that employment remains far below the pre-pandemic level, suggesting that patience is needed. Other members have expressed concern about inflationary pressures and excessive risk-taking in financial markets because of the Fed’s asset purchases. Tapering can impact long-term interest rates through both its direct effects on bond markets and the signal it provides about the Fed’s future policy intentions.

Since tapering refers to the slowing of the Fed’s bond purchases rather than the reduction of its holdings, the Fed’s balance sheet is still growing, and thus the Fed is providing monetary stimulus to the economy. This could restrain any upward pressure on long-term rates from the Fed’s tapering. However, long-term rates also reflect market expectations about the course of short-term rates. Since tapering can signal to markets that the Fed is shifting to a less accommodative policy stance in the future, this could lead to a rise in long-term rates.

Tapering doesn’t necessarily mean yields will spike higher. In the previous period of tapering, yields rose prior to the onset of tapering in 2013 but then fell during the implementation period. The pattern was like earlier periods when the Fed started and stopped QE. Yields rose during periods of QE and fell when QE ended.

The Fed has made clear that tapering will precede any increase in its target for short-term interest rates. So, tapering not only reduces the amount of QE, but it is also seen as a forewarning of tighter monetary policy to come,

Bond market movements will act as key indicators of the health of the recovery, as well as corporate performance and consumer confidence in 2021 and beyond. Compared to 2020, when global monetary and fiscal policies were focused on supporting solvency and bond investors benefitted from flocking to safe-haven assets, such as U.S. Treasuries, this year may entail a more idiosyncratic environment for credit, which will make active portfolio management paramount. If intermediate to long-term yields rise in anticipation of the Fed reducing its asset purchases, we suggest investors use that as an opportunity to increase the average duration in their portfolios. We have been suggesting keeping average duration low over the past year and would use a moderate rise in yields to add some longer maturity bonds to generate more income over time. A bond ladder strategy still makes sense to us in this environment, given the steepness of the yield curve.

Do not be surprised if there is an uptick in volatility for the riskier segments of the bond market. Over the past year, QE has provided an incentive for investors to take on more risk, and as asset purchases come to an end, it could spook the riskier segments of the market.

Listed Property

It is important to take note of the REIT resilience through the crisis and their ongoing recovery. Capital markets are open, and we are observing growth-oriented M&A transactions that reflect confidence in business models and sector outlooks. Operationally, REIT earnings are recovering quickly and are well positioned to take advantage of a growing economy because they entered the crisis with historically strong balance sheets and access to credit and liquidity.  Nevertheless, uncertainties remain. Most critically, how will the future of office use evolve as firms return to the office and experiment with hybrid and work from home arrangements.

Another topic of widespread discussion is the potential threat of inflationary pressures as economies reopen.  REITs may perform well if inflation should increase. Historically, REITs outperformed in periods of moderate and high inflation, while providing competitive returns in periods of low inflation.

The recovery in commercial real estate, like much of the rest of the economy, is likely to be uneven across sectors and subject to various lags and delays. Indeed, commercial real estate recoveries in the past have often lagged the turning points in the macroeconomy.  There are, however, some important parts of the commercial real estate market and REIT universe that are not trailing the macroeconomy during this recovery. Sectors that support the digital economy have enjoyed booming demand over the past year as social distancing requirements prompted many types of economic activity to shift from in-person interactions into the digital realm.

These markets include industrial properties, dominated by the logistic facilities that are critical for the fulfillment of goods bought on the internet; data centres, which house the servers that host websites and route data communications from their source to destination; and cell tower infrastructure, which own the structures that house equipment used to transmit wireless voice and data communications.

Other sectors of commercial real estate will likely lag the overall economy. Lodging/resorts and retail property markets have stabilised but are unlikely to see significant improvement until travel volumes and shopping patterns get much closer to pre-pandemic patterns. Travel volumes and foot traffic in stores have been picking up this year, but a full recovery is unlikely to be completed until 2022. Senior housing properties within the healthcare sector have experienced a drop in occupancy due to a hesitancy to move in during the pandemic, and higher costs for personnel, PPE, and cleaning supplies.

The lockdowns imposed in mid-2021 have halted the recovery in retail and will delay leasing activity in the office segment. However, the achievement of minimum vaccination levels should end the lockdowns by the end of the year, based on the government’s plan, providing a more certain timeline for reopening, and reducing risks around lockdowns from 2022.

Growing Optimism across the real estate sectors and record low interest rates have led to several players seeking to grow through mergers and acquisitions. For example, Dexus is merging its Dexus Wholesale Property Fund with AMP Capital’s Diversified Property Fund to create aA$15 billion fund and is also in the process of acquiring APN Property Group, a smaller listed real estate company. I think it’s a sign of the times that people are starting to grow through M&A, reflecting the volume of direct real estate deal flow in the current environment, and desire to build funds under management.  The mood in Australia is upbeat, albeit with a tinge of frustration as players are keen for the market to really get going once more.

Australian Equities

Right now, volatility is creeping into the stock market and there’s good reason for it. First, stock markets have been in record territories around the world. Second, the Delta variant of the Coronavirus is causing lockdowns in places like Australia and NZ, and the infection cases in the US are starting to look threatening in states where they have low vaccination rates. This is starting to lower 2022 economic forecasts, and that’s why commodity prices are weakening and why our dollar is now 71.2 US cents. Taking all this in, profit-taking players could easily cause a stock market sell-off over the next few weeks. When markets sell off, I try to buy quality companies that have become great bargains.

This chart below shows how over 70 years – 1950 to 2020 – the weeks of August and September can be stock shockers!

You then see in this chart how the markets recover from October into December for market investors. And given stock markets buy now based on what lies ahead for company profits and the economies that drive those profits, I’m tipping a selloff in coming weeks will drag out buying opportunity players, who know the implications of this chart.  Note how historically the market also does well from January to April. And given the consensus still believes the escalation of vaccinations will power the global and local economies in 2022, we’ll be joining in the buying if we do see some scary weeks ahead.

Helping me to be confident is the willingness of governments around the world to spend to beat the negative confidence effects of this virus. And even central banks are basically saying they won’t raise interest rates if this Delta strain undermines the economy.  That’s a good lesson to learn. But when history lines up with historically low interest rates, unbelievably accommodating central banks and governments willing to spend to beat recessions, it’s not a stretch to suspect that after a sell off, which I reckon won’t be excessive, there will be a stock market bounce-back.

We continue to believe the smart play is to accumulate beneficiaries of an eventual COVID exit and reflation. The 2020 ‘COVID winners’ in Retail/Online, Staples and Healthcare offer a perceived haven amid Australian lockdowns. However, we think markets will look through this to successful models of vaccination and economic reopening overseas to the likes of the UK (68% vaccinated) and Israel (75%).

So long as the vaccine rollout progresses according to plan, we believe the positive rotation towards coronavirus-vulnerable sectors will resume. Valuations remain attractive despite the strong run in some cyclicals (Retailers, Financials, Housing, Resources), we think there is scope for second phase COVID exit sectors Energy (STO, KAR), Gaming (ALL, TAH), Financials (MME, TYR), Travel (CTD, AQZ), and Chemicals (NUF, IPL) to benefit over the course of the year supported by strong household balance sheets, low-interest rates and improving consumer sentiment.

Global markets

Markets face the debt ceiling conundrum, the deteriorating situation in China and the upcoming reporting season which has a very high bar of expectation. Fed to start policy normalisation ahead of the ECB and BoE. For the US, the pivot toward tighter policy has largely occurred. The latest minutes from the Federal Open Market Committee (FOMC) noted that, “provided that the economy was to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year.” In their discussion surrounding the timing of tapering, all FOMC participants assessed that the economy had made progress toward the maximum employment and price stability goals since last December.

All major economies are in expansion, but the global recovery continues to become less synchronised due to different rates of vaccination and amounts of policy stimulus. Developed markets tend to have more favourable near-term backdrops, with reopening progress in Europe coinciding with improving consumer and services sentiment. China’s deceleration continues, though we expect growth to stabilise toward year-end. Many developing economies continue to struggle with low vaccination rates and more meagre resources to confront the Covid-19 Delta variant, leading to slower and more uneven progress in countries such as Brazil and India. Despite the pattern of staggered and uncertain headway against the virus, the general trend of fewer restrictions on activity likely implies a continued broadening of the global economic expansion over the course of the next year.

The improving cyclical backdrop is constructive for more economically sensitive asset classes, such as stocks, that tend to do well as activity improves. Financial markets have become increasingly sensitive to and dependent on extraordinary levels of policy support. Going forward, policymakers support of such measures may wane due to rising inflation expectations.

Buoyant asset valuations reflect positive expectations built into asset prices and create the potential for outsized bouts of volatility. Portfolio diversification remains as important as ever, with the valuations of non-US and value equities and inflation-resistant assets appearing relatively favourable.


Real-time data suggests that U.S. economic activity has hit a speed bump as total COVID-19 cases continue to climb higher amid bottlenecks across the supply chain. Fortunately, the rate of new infections has slowed in September. The silver lining may be that some people formerly reluctant about getting vaccinated have decided to get vaccinated. Stress and uncertainty are starting to hurt the economic recovery. The number of passengers going through airport security has retreated, along with dining and hotel reservations, as people grow more cautious. All of this is happening as much of the federal government support for the economy is fading. The Supreme Court struck down the Biden administration’s attempt to extend the eviction moratorium, putting 750,000 families at risk of eviction, and much of the unemployment aid has finished, cutting off financial support to millions of people — and the broader economy.

These financial lifelines are ending as prices of many basics, like food, gas and rent are rising, further straining the budgets of low-income and middle-class Americans.  Inflation is at a 13-year high, and petrol prices are the highest this since 2014. Where the U.S. economy goes from here largely hinges on two things: consumer spending and hiring. Spending has been strong for months on goods like furniture and cars, but now economists are looking for a rebound in restaurants, entertainment, and travel. How much the delta variant hurt the service sector in August remains to be seen, but a modest pullback is apparent, looking at real-time spending and mobile phone data.

Delays in workers returning to the office mean fewer people in many areas and less need to staff up restaurants, hair salons and other services that cater to white-collar workers near their offices. Certain industries such as live entertainment are still struggling.

I think Jerome Powell will have to maintain his dovish stance, stating that tapering is coming, but staying vague on the details. In a world without government shutdowns and threats of debt default, tapering by late November would be certain, but until there’s clarity on fiscal policy, the Fed may have to wait. The Fed will have to begin tapering eventually, probably by US winter. A rate hike may not come until late 2022, as Fed officials go slow because the economy is so dependent on fiscal policy. So, if you like the glass half full as we do, the inescapable conclusion is that the Fed doesn’t have to move aggressively to take away the stimulus.


Sentiment in the euro area is brightening. Despite growing COVID-19 incidence numbers, consumers and firms are becoming more upbeat about the future. The European Commission’s economic sentiment indicator has improved markedly since the beginning of the year and was near record highs in August. Manufacturing is expected to perform strongly, even though supply bottlenecks are holding back production in the near term. The reopening of large parts of the economy is supporting a vigorous bounce-back in the services sector. But the Delta variant of the coronavirus (COVID-19) could dampen this recovery in services, especially in tourism and hospitality.

At the same time, consumer prices are increasing at a faster pace, following years of very low inflation. In August, inflation in the euro area stood at 3%, significantly exceeding the 2% mark that the Governing Council of the European Central Bank (ECB) has defined as its new medium-term inflation target. In Germany, the inflation rate, as measured by the Harmonised Index of Consumer Prices (HICP), hit 3.4% in August – a level not seen in 13 years. And it is likely to continue growing until the end of the year. People are understandably worried about these developments. Higher inflation lowers the purchasing power and reduces wages and interest income in real terms – that is adjusted for inflation.

With the eurozone’s stronger-than-expected rebound from the winter wave of the pandemic, the ECB said it would reduce the pace of its bond-buying “moderately” for the next three months. It didn’t name a figure, but media reports suggested the new target will be between €60 billion and €70 billion, down from a rough average of €80 billion a month through the spring and summer. In a rare sign of harmony, ECB President Christine Lagarde noted that the decision had been unanimous across the bank’s Governing Council. But the bank, and the analysts who follow it, warned against reading too much into a step that, in essence, only reverses the decision it took in March to ramp up the stimulus.


Monthly GDP growth continues to point to a strong recovery in the third quarter. Similarly, business surveys, consumer confidence and mobility trackers signal a strong rise in activity, particularly in the services sector. At the same time, computer chip shortages have disrupted car production, acting as a drag on manufacturing output. The new Delta variant of the coronavirus has driven a sharp increase in the number of daily new cases, but the impact on the health system is limited given the advanced vaccination progress. As a result, the impact on GDP growth is also expected to remain limited. Meanwhile, consumer price inflation rose sharply to 2.1%. While the drivers of inflation are mainly related to transitory factors affecting energy and transportation prices, survey indicators also signal a more broad-based increase in production costs, including wages, and a pass-through to prices charged.


The greatest downside risk faced by the Japanese economy is the continued spread of COVID-19. In addition, supply constraints due to the shortage in semiconductors could cause prolonged stagnation in the purchase and export of motor vehicles and some consumer electronics products. There are also concerns that the high price of natural resources could have a negative effect on corporate earnings and household income. In addition to crude oil, a broad range of commodities including nonferrous metals such as copper and gold, grains such as corn and wheat, and lumber, are on the increase. Since Japan depends on imports for most of the natural resources it uses, when prices rise, it can easily lead to an increase in import prices.  The BOJ probably thinks the supply-chain disruption and global chip shortages will be resolved sooner or later. But there’s new risks emerging from China’s slowdown. The Bank of Japan kept monetary policy steady, but offered a bleaker view on exports and output, reinforcing expectations the bank will maintain its massive stimulus even as major counterparts eye a withdrawal of crisis-mode support.

The gloom hanging over manufacturers, hit by Asian factory shutdowns caused by the coronavirus pandemic, adds to woes for Japan’s fragile recovery, which has been hobbled by weak consumption. Weak inflation has also reinforced expectations the BOJ will lag other major central banks in dialling back stimulus. Core consumer prices fell 0.2% in July from a year earlier to mark the 12th straight month of declines, as weak consumption discouraged firms from passing on rising raw material costs to households.


China’s high-profile crackdowns on property developers, technology firms and other private enterprises are starting to weigh on business activity and add to financial risks in the country, raising the potential that Beijing’s campaigns could harm the broader economy.  Over the past year, China has taken numerous regulatory actions, including fines and other penalties, affecting a range of industries as it tries to reduce inequality, rein in excessive debt and force businesses to hew more closely to the Communist Party line. Beijing officials signalled that the country’s strong recovery from Covid-19 provided a window of opportunity to act, enabling them to tackle social and economic imbalances without derailing its overall growth trajectory.

Retail sales growth slowed to 2.5% from a year ago, much lower than the 7% estimate in a Bloomberg survey of economists, as consumers cut back on spending during the summer holiday break. Construction investment contracted 3.2% in the eight months of the year, a reflection of the government’s steady tightening of property restrictions as part of a campaign against financial risk.

Last year, Beijing also implemented its “three red lines” policy, the number referring to three strict caps placed on the ratio of debt a property developer can hold in relation to its assets, equity, and cash on hand.  Under this combination of new rules, Evergrande could not sell enough apartments fast enough to pay back its debts at the pace mandated by regulators. One question is whether pushing Evergrande to shape up may destabilise the whole Chinese banking system. Buyers are so spooked over Evergrande that other developers are now seeing falling property sales and plunging stock prices, potentially setting off more property defaults in China.

Evergrande stock in Hong Kong – Year-to-date moves in HKD

China’s slowing growth underlines how the spread of the delta variant of the coronavirus is challenging the world’s economic recovery from the pandemic. The slowdown in construction — which pushed China’s steel output to a 17-month low in August — is rippling across the global economy by reducing Chinese demand for commodities such as iron ore.  China’s government is refraining from broad stimulus to support the economy, with policy makers ramping up targeted programs for smaller businesses instead and pledging fiscal support using local government bonds. The PBOC maintained its measured policy approach Wednesday by rolling over its medium-term loans coming due rather than injecting more liquidity.

Many economists expect the People’s Bank of China will cut the reserve requirement ratio for banks again in coming months following a surprise reduction in July. Beijing in recent months has been tightening access to financing for real estate developers and reducing the pace of mortgage lending to home buyers as it tries to prevent the build-up of financial risks and reduce its economic dependence on property. Growth in property investment slowed and property sales weakened in August.

Emerging markets

The souring sentiment toward emerging markets comes after the group dominated growth in the closing months of 2020 and the start of this year. Investors piled into economically sensitive stocks in the so-called reflation trade after China became the first major economy to rebound from the pandemic.

Now China has become somewhat of an outcast as it clamps down on private enterprise it blames for exacerbating inequality, increasing financial risk and challenging the government’s authority. Meanwhile, the world’s second-largest economy is suffering its own outbreak of the delta variant prompting analysts to lower their economic growth projections as risks escalate.

China is a net importer of goods from many Southeast Asian countries such as Malaysia, Thailand, Vietnam, Singapore and Indonesia, so a slowdown in demand would have knock-on effects for their currencies.

Soaring food and energy prices have pushed inflation to uncomfortably high levels. In Brazil consumer prices are 9% higher than they were a year ago more than twice the central bank’s target. In Russia inflation is 6.5%, well above the central bank’s aim of 4%. Inflation in India, which had been high in 2020, rose above 6% this summer—north of the Reserve Bank’s target range.

The pandemic has shown that the emerging market complex is looking more mature, with Brazil and Russia hiking interest rates to maintain credibility. This is a stark shift from 2020, where central banks across the world were forced to cut rates to protect economies following the onset of the virus. While developed markets remain mired in emergency level policy settings, it is pleasing to see the emerging world pivot to a more proactive stance.

In fiscal stimulus terms, there haven’t been substantial moves outside of those countries with large international reserves or the ability to borrow capital on the international market. The emerging markets approach has been cautious and supportive.

We have been neutral on emerging markets for some time now driven largely by a mix of tight policy and waning momentum in China. The latest Covid developments add to our caution and further cloud the overall outlook for emerging markets. Unequal access to vaccines is further widening the recovery gap between advanced and developing economies, the International Monetary Fund warned late last month. It reduced its growth forecast for emerging-market economies to 6.3% from 6.7%, while raising estimates for advanced ones by 0.5 percentage point to 5.6%.

While the percentage of population fully vaccinated has risen to around 50% for the U.S. and European Union, it’s about 20% for Brazil, 8% for India and Indonesia, and just 4% for the Philippines.  The accessibility of vaccines has a direct impact on the pace of reopening across countries and is a key issue for investors. Going forward, it boils down to which countries can effectively immunize their population as early as possible, against unknown elements such as new variants of the virus


The sharp uptick in inflation appears to be the result of a multitude of factors — and it could persist for years to come. There are several asset classes that are known to outperform broad markets in times of high inflation Common anti-inflation assets include gold, commodities, various real estate investments, and TIPS.

It makes sense to approach gold strategically in 2021 by allocating around 5% to 10% of your entire investment portfolio to gold and with a long-term investment horizon.  The long-term secular uptrend exhibited by gold is something that you cannot ignore and highlights the importance of owning gold in the portfolio as a diversifier.

Historically, gold has often rallied in periods of high inflation and when uncertainty prevails. Thus, tactically owning gold in the form of Gold ETFs, Gold Savings Funds, and/or Sovereign Gold Bonds will help you diversify your investment portfolio. Moreover, it would serve as a hedge (when other asset classes fail to post alluring returns) and command a store of value in times of economic uncertainties. Note that, unlike financial assets, gold is a real asset, and hence make it a point to strategically own some gold in your portfolio. That said, don’t expect double-digit returns from gold in the calendar year 2021.


The Organization of the Petroleum Exporting Countries said that demand for oil was expected to rebound above pre pandemic levels next year. In its Monthly Oil Report, the group said it expected oil demand to average 100.8 million barrels per day in 2022, compared with just over 100 million in 2019, before the pandemic took hold.

The forecast is evidence that the world economy is still heavily dependent on emissions-causing fossil fuels, despite growing concerns about climate change and a steep fall in oil demand during the pandemic. The news emerged just as world leaders were preparing for what many analysts predict will be a crucial climate summit, known as COP26, in Glasgow in November.

Sales of electric cars have grown strongly, and investment in wind and solar energy has held up surprisingly well during the pandemic, but the growth in demand for energy, especially in China and India, will offset such gains, according to OPEC forecasts.

Sector 12 Month Forecast Economic and political predictions
AUD 0.75c – 0.80c

AUD/USD is expected to rebound in the midterm after lockdowns in Australia are lifted

The mood in the market is largely bearish in the near term. Any uncertainty is largely down to the impact of COVID-19. Lockdowns, which began in early June, have continued and in some states have even been made stricter. Australia is the world’s major exporter of commodities. It’s the largest exporter of iron ore. It also exports large volumes of coal, liquefied natural gas, gold, and uranium. As a result, its currency is closely linked to both energy and commodity prices. Given that a lot of its commodity exports go to China, the economic health of China plays a key role in determining the Aussie dollar’s value.
Gold $1838-$2075


I expect gold prices to trade sideways over the coming months, along with bouts of volatility, as conflicting factors continue to affect the asset. The low correlation of the gold price with the prices of other asset classes makes gold investments an attractive instrument to diversify investment portfolios.



WTIS US$70 -US$80

Energy is the only undervalued sector

ESG themes. Global decarbonisation is good news for the metals sector

There is a highly compelling investment case for natural resources companies that are positioning themselves on the right side of decarbonisation investment trends and broader ESG themes. 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.



Australian REITs were resilient in FY21 as they benefited from low Covid-19 cases in most parts of the country. Retail REITs continue to address structural changes in the sector to ensure demand for their properties remains high, including investing in certain types of tenants, customer loyalty programmes and additional facilities for retailers.
Australian Equities 7200 – 7650


This is a market for active stock-pickers.

The impressive run in Australian shares over the past 12 months leaves little in the tank for the remainder of 2021, leading market strategists to predict a bumpy turn as the FY22 begins. Upside risks to earnings are balanced by valuation multiples that are likely to compress as the market considers a peaking of growth rates, fading policy support and the prospect of higher long-term bond yields.
Bonds 1.5% – 2.5%

Short duration warranted

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

Central banks are “currently incentivised to delay talk of tapering until they are much closer to their objectives.  Inflationary expectations have been driving bond rates recently.

A further 0.5% increase in bond rates this year seems likely with further comparable increases in the following years.

Cash Rates 0.1

On Hold

The recovery in the Australian economy has been interrupted by the Delta outbreak and the associated restrictions on activity.

At its monetary policy meeting on 7 September, the Reserve Bank of Australia (RBA) decided to keep the cash rate unchanged at the all-time low of 0.10%.

Global Markets
America S&P 500



U.S. stock valuations are high on a price-to-earnings (PE) basis, which values a stock relative to its prior or future earnings potential. Since the S&P 500 Index appears to be fully valued I believe that modest index-level returns could persist over the next several months.
Europe  European Index


Autos, Energy and Materials. We also like European banks, given consensus earnings expectations look far too low to us at just 1% growth next year.

I think it’s time to add risk back to portfolios again, as I believe that the summer growth scare is nearing a conclusion and that the absence of further negative news in this regard should be sufficient to prompt a tactical rally into year end.
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. Emerging market 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 also 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.


Like This