COVID disruptions aside, August was another positive month as share markets worldwide leapt higher.
Strong earnings, particularly in Developed Markets, continue to reinforce the upward trend in share prices. The Federal Reserve recently signalled that monetary support would unlikely be rewound with any great haste, which further settled markets.
After the sharp pullback we saw in China last month, shares in emerging regions enjoyed a minor recovery. Bond yields remained relatively flat during August, reflecting uncertain growth and inflation outlooks across major economies.
Earnings Recover in Australia
With the reporting season coming to an end, Australian companies have managed to post some really encouraging results. On the whole, earnings have rebounded quite strongly due to improved trading conditions in the second half of the year. Over the last twelve months, we’ve also seen an above-average number of companies increasing their profits and dividends.
The two standout Australian sectors were the Miners, who could benefit from surging commodity prices and the Banks, who have gained from a booming home lending market.
Unsurprisingly, several companies have opted not to provide any forward earnings guidance due to the uncertainty relating to ongoing COVID disruptions. While certain industries will be more affected than others, overall, it is likely that Australia’s earnings growth trajectory will flatten over the coming year.
Wage growth remains sluggish.
Inflationary fears in Australia eased somewhat during August, following the release of fairly weak wage growth data. Australia recorded just 1.7% for the twelve-month period until the end of June, which fell well below market expectations.
The RBA has always maintained that faster wage growth will be the key factor in achieving persistent inflation. In the RBA’s minutes from a meeting earlier this year, Governor Philip Lowe stated that for inflation to rise to levels consistent with its target range, it was likely that wage growth would need to be sustainably higher than 3%.
For this to occur, Australia would need to experience a tight labour market for a significant period of time. While unemployment numbers have been improving recently, the level of underemployment – being those who have jobs but would like to be working more hours – has unfortunately started to trend upwards again. Also, now with NSW and VIC in a deep period of lockdown, progress towards full employment is expected to worsen, reducing the upward pressure on wage growth and inflation in upcoming periods.
So, what does that mean for investors? Well, until the RBA starts to see low unemployment drive up wage growth, it is likely to maintain its record low-interest rates, which should continue to bode well for growth assets, such as shares and property, certainly for the foreseeable future.