Posted 05.08.2021 in Investment Planning
The Australian market continues to tick along nicely, again, displaying a willingness to look through the recent COVID disruptions in the eastern states. Share markets across developed regions also closed the month near record highs as strong earnings, particularly in the US, continue to drive performance.
Shares in Emerging Markets, however, fell sharply as Chinese regulators increased its scrutiny across a range of sectors, including technology, education, and real estate. As China looks to encourage population growth (couples may now have up to three children), the regulatory crackdown is intended to target anti-competitive practices and improve education affordability for families.
We also saw bonds rally in July as yields steadily declined throughout the month, signalling concerns that economic growth could be peaking or possibly even contracting, as the Delta strain continues to hinder the recovery plans of various economies, including Australia.
Unfortunately, we’ve seen the COVID situation in NSW go from bad to worse in July as community cases increased gradually throughout the month. With that state now facing the prospect of a lengthy lockdown, analysts are now expecting a quarterly GDP contraction in September, which would see Australia staring down the barrel of a second possible recession within eighteen months.
On a more positive note, the vaccination rollout has ramped up significantly in recent weeks with the country currently administering approximately 1.2 million doses per week. At this rate, Australia should be able to reach the Government’s “transition phase” milestone of 70% of the adult population vaccinated by December, and its “consolidation phase” milestone of 80% vaccinated by January next year.
Only time will tell whether these threshold levels will prove sufficient to achieve herd immunity. However, perhaps a blessing in disguise from trailing the rest of world with its rollout, Australia will have the benefit of observing how other countries, like the UK, fair in their transition back to normalcy before definitively deciding on a final acceptable number.
Aside from COVID disruptions, inflationary fears have been one of the key catalysts in generating market volatility this year. After the recent jump in prices in the US, there was certainly some anticipation surrounding the release of the quarterly CPI numbers in Australia last week. Yet once again, the results were somewhat unremarkable. Read more about how inflation can affect your portfolio here.
While the jump in headline inflation might look alarming on first glance, the year-on-year figure of 3.8% for the June quarter was broadly in line with market expectations and a direct result of the abnormal circumstances we saw twelve months ago, where fuel prices collapsed, and childcare fees were waived in response to the pandemic. Both of which have been reversed today.
In managing its monetary policy, the RBA will also consider the level of core inflation, which essentially excludes some of the more volatile items in the headline number and ultimately provides a better indication of the underlying trend in prices. Core inflation measured only 1.6% for June, which is still well below the RBA’s target range and given the worsening COVID situation in NSW, the RBA likely have enough reasons to maintain its accommodative policy into the foreseeable future.