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Despite ongoing concerns that the market is overheating, share markets continued to perform strongly during March. 

The Australian market jumped higher for a sixth consecutive month after economic growth and employment numbers both came in better than expected. The rapid rollout of vaccinations in the US, combined with the approval of President Biden’s stimulus package, led to a bumper month in Global Developed MarketsWhile policy tightening in China was influential to the lower relative performance in Emerging Markets.  

Vaccination rollout off to a slow start

Australia has now had its first full month of COVID vaccinations, and fair to say, the rollout rates have been somewhat disappointing so far. Having initially promised to deliver 4 million doses by the end of March, Australia only managed 700 thousand, which equates to just 2.8% of the population.

Israel has been the global frontrunner and is currently vaccinating its people faster than any other nation. While the US and the UK have both made impressive inroads with their rollout programs as well.

Although Australia’s rollout has been plagued by supply and distribution issues, it could be argued that there just hasn’t been the same urgency compared to countries like the US and the UK, whose situations have been far more desperate.

However, as we saw in Brisbane prior to Easter, until an overwhelming majority of the population has been vaccinated, countries will continue to be at risk of additional virus outbreaks and further lockdowns. Additionally, any subsequent disruptions are likely to have an adverse impact on share market performance, given economic recoveries are already largely priced into markets.

Unemployment continues to fall

On a more positive note, Australia’s employment numbers have been really encouraging in recent months. As of the end of February, 99.8% of the jobs lost between March and May at the height of the pandemic, have now been regained.

A key metric that is often observed by the RBA when setting its target interest rate is the level of underutilisation or spare capacity in the labour market. Spare capacity is typically measured by summing together those that are unemployed, with those that are underemployed and would like to be working more hours.

When spare capacity is reduced to a low enough level, it tends to force upward pressure on wage growth and inflation, and this is exactly what the RBA will be wanting to see before it considers raising interest rates. However, with JobKeeper terminating at the end of March it’s expected that up to 150,000 jobs might soon be lost. Meaning that this downward trend in unemployment may begin to track sideways, at least for the next few months.

Family office sting

Family office firm, Archegos Capital Management sent shock waves through the market during March, after they were forced to sell down highly leveraged positions worth billions of dollars.  In the aftermath, Archegos is said to have lost approximately $US20 billion dollars in just a few days. While the firm’s lenders, Credit Suisse and Nomura, could be facing losses of $US5 billion.

The case study highlights several underlying themes that are present in today’s market environment. Firstly, with interest rates at record lows, there is an increasing temptation for investors to take on greater risk in pursuit of higher returns. The return for holding cash is negligible today, while borrowing rates have never been cheaper. The enticement for investors is to borrow, or leverage up, and put their money into growth assets, so long as they can afford the additional risk.

This leads us to the second key takeaway, being the absence of prudent risk management by all parties involved. It is absolutely essential that all investors, big or small, make appropriate risk assessments when formulating their investment plans. At a minimum, the following two points should always be addressed:

  1. How much risk is required to achieve the desired return; and
  2. How much risk can you afford, should market conditions become unfavourable.

As with the GameStop episode earlier this year, the fall of Archegos will certainly cause some big losses for individuals, however the impact on the broader market should be less significant. As always, investors can best limit their exposures to such instances by remaining diversified across multiple regions and sectors, with an appropriate allocation to both growth and defensive assets.

If you enjoyed this update, view our February Market Update.