Solid start for Australian markets in 2021

Economic E-News February 2021

By Craig Turnbull
Chief Investment Officer

Australian equities have come out of the gate quite strongly in 2021, driven by higher commodity prices, a resurgent Wall Street and the allure of a COVID-19 vaccine.

Strong demand for gold, oil and iron ore prices have underpinned the ASX 200 since the start of the year while Wall Street’s main indices are also driving improved local sentiment.

The ASX 200 is up around 4.0 per cent so far in 2021 while the ASX Accumulation Index has risen by 3 per cent.

The local market has been further bolstered by strong quarterly US earnings and an assumption the new Biden Administration will approve more stimulus funding.

Domestically, all eyes are on the current earnings season which is showing a significant rebound in corporate profits six months after Australia’s worst reporting season in more than a decade.

Consumer confidence

A surge in retail spending from a cashed-up public and a strong housing market has underpinned consumer confidence.

Australian consumer sentiment bounced back towards a 10-year high in February as the mostly successful containment of coronavirus across the nation instilled confidence about the economic outlook.

Business confidence also remained above its long-run average with employment conditions in positive territory. The turnaround in business conditions from 2020 is leading to improved employment and capital expenditure activity.

Early updates from retailers are showing that the sector is strong as money earmarked for international travel is being redirected to the cash register.

Dollar on a roll

There will be some downward pressure on companies deriving earnings offshore, as a firming Australian dollar is keeping a lid on repatriated income.

Australia’s high exposure to commodity exports and expectations of stronger global growth are contributing to the higher currency. The Aussie rose 20 per cent in 2020 despite interest rates hitting a record low of 0.1 per cent and the Reserve Bank’s continuation of a quantitative easing program.

RBA governor Philip Lowe has said the RBA will not increase rates until wages growth, which has been less than 3 per cent for almost seven years, was “materially higher than it is currently”.

The dollar fell towards 0.55c in March, but it has since recovered and is now hovering around 0.77c.

Dividends and super

In the wake of the COVID-19 outbreak, many companies cut or withheld dividends which is part of the reason why the Australian equities underperformed in 2020. Any return to a distribution to shareholders could reinvigorate investors and further boost the market.

For instance, the Commonwealth Bank announced an increase in its dividend from the second half as part of its interim profit result. This comes after the Australian Prudential Regulation Authority raised a cap on payments in December. Back in July, the regulator had limited dividends to 50 per cent of earnings, easing recommendations issued in April that lenders defer returns during the pandemic.

Company dividends form part of your superannuation returns and many Australian dividends bring franking credits that boost your after tax returns.

The rollout of the COVID-19 vaccine will also have a bearing on company forecasts. While many are reluctant to offer guidance amid a health crisis, the availability and acceleration of vaccines, both locally and overseas, should have an overall positive impact on the market.

What do you know about investment risk?

We all take risks every day, most of them small, but we’re usually aware of the risks and we take precautions.

Well, it’s the same with your investments. It pays to understand what risk you’re taking when you make any sort of investment decision.


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