Covid-19 and response of societies have shaped the last two years, and will influence the next decade. In the short term, the next quarter will see further opening up as vaccine rates seek to approach the highest in the developed world. That Australia has come from behind, and now has overtaken the US in double dosed vaccinations is remarkable. While that should give us some flexibility in options for further health responses it will also enable a more dynamic post COVID economy. Caution is still warranted as we look to well vaccinated countries such as the UK and Israel that continue to have infection and hospitalisation waves, albeit at much lower levels. The pandemic is transitioning to an endemic or pervasive feature of our world that will continue to be dealt with.  Fortunately further medical advances will help with rapid testing, new preventative medical therapies, and booster shots that eventually will be tailored to new variants.

Economically Australia is expected to have a solid fourth quarter, particularly as NSW and Victoria emerge from restrictions during October. The US company earnings season for Q3 is part way through and is showing continued strong earnings growth that is beating expectations, supporting a more positive view. The economic projections for Australia, the US and other countries are on the whole positive for the fourth quarter 2021, noting some slowing projected for Q1 to Q2 2022. 

Government bond markets are reflecting the combination of rising expected inflation in the medium term and some element of the growth recovery. Credit markets have hardly moved through the recent equity market declines in the last month. Option protection that had been prevalent is now priced to indicate that market participants are more bullish going into the end of the year and a little beyond.  The combination of concerns that equity markets worked through in August and September appear to be a lesser worry now, supported by the credit market resilience. 

Leading indicators of economic performance and liquidity measures and forecast policy action will be our main focus as we transition through and beyond year end. We note that the pace of monetary support will decline as the US Federal Reserve begins to taper bond purchases towards the end of this year. The RBA has signalled some continued bond purchases through early next year and are holding fast to their target to hike cash rates in 2024. This is despite short term bond markets pricing in an earlier rate hike cycle by the RBA. The final shape of the US fiscal stimulus package that is being navigated through the US Congress which should be somewhere between $1.5 and $3.5 trillion. The devil will be in the detail, including the extent of tax hikes that have an offsetting brake to the economy.

Given that the path of inflation is still emerging, likely with some persistence as temporary effects wash out with cycles in housing, energy costs, and wage rises, there are still many deflationary and demographic factors to come. Having a portfolio that can benefit from some of the differing pathways of investment assets is sensible, particularly holding real estate and other real assets, while also ensuring that equity management styles are both diversified across value, growth and quality. We believe a focus on quality will be the most resilient style regardless of whether we have a high or low inflation environment.

Some thoughts on longer term themes that are playing out in current markets include three major areas:  Energy, China’s transition, and Social Changes. The new energy transition to renewables and more meaningful climate targets has led to consequent underinvestment in fossil fuels and selected metals. Opportunity is presented in green infrastructure, methods for carbon capture, and carbon credit creation. China’s desired transition to a consumer led economy while managing excesses in the financial system and concerns around fair distribution of wealth acknowledge social cohesion and party control is key. Five year plan objectives include a focus on ‘common prosperity’, environmental objectives and backing national champions in technology industries. Social changes globally are noting a shift to the left as we undergo generational change and political parties pivoting their strategies to address the changes to the voter base. A more vocal community view is being voiced on environmental and social issues which is also being reflected in investment priorities of business and institutional investors to embrace sustainability and ESG issues. We believe all of these issues need to be addressed in longer term strategies we provide to clients. Our firm assesses ESG and sustainability matters integrated with our traditional investment methods to manage risk and seek opportunities.

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This month’s perspective highlights that market sentiment on all asset classes is constantly changing. It is important for us to quickly recognise any threats, to preserve your investment capital or to identify early investment opportunities to maximise any return advantages. At Partners Wealth Group we don’t get complacent with the current state of play and constantly monitor investments and your portfolios.

If this article has raised questions regarding your personal situation, please contact your Partners Wealth Group advisor directly or on 1800 333 143.

This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider you financial situation and needs before making any decisions based on this information.