The recent grounding of a cargo ship one of the world’s busiest trade routes, distils the sometimes complex world of financial markets back to basic economics - supply and demand. Lloyd’s List estimates that more than $9 billion worth of goods passes through the 120-mile waterway each day, translating to around $400 million per hour . The blockage has delayed the supply of a range of parts and raw materials for European products such as cotton from India for clothes, petroleum from the Middle East for plastics, and auto parts from China.
The ripple effect of the trade route blockage may take months to unwind as supply chain disruptions are worked through, so far oil prices and consumer discretionary items have seen the most significant impact from the temporary stall in trade.
Despite some hiccups, share markets continued up as investors focussed on the rollouts of vaccines and the huge USD$1.9 trillion US fiscal stimulus package. This support saw many major share markets finishing the quarter up over 4%.
The Australian share market was boosted via a productive half-year company reporting season which broadly exceeded the expectations of investors and positive jobs data. Many major companies had reduced their operating costs significantly throughout the pandemic and then achieved better than expected revenue growth. Concerns about job losses from the removal of the Australian government stimulus program ‘JobKeeper’ appear to have reduced, as the unemployment rate continued to move down faster than anticipated, from a high of 7.5% in July 2020 to 5.6% in March 2021ii.
While cash rates remained unchanged, the yields for long maturity bonds were sharply higher during the quarter, which saw fixed interest security returns nosedive (the return and yield of bonds share an inverse relationship).
Several events occurred in March which contributed to yields shifting higher. There were growing expectations that the US Federal Reserve may increase interest rates earlier than previously expected. The recent US stimulus announcements (‘American Rescue Plan’ US$ 1.9 trillion, proposed US$ 3-4 trillion infrastructure spend) coupled with a successful vaccine rollout and better than expected economic data contributed to this view.
With many central banks all facing similar economic challenges, a swift global sell off ensued. This is highlighted in the chart below, the yield of the Australian government bonds maturing in 10 years shifted higher relative to shorter maturity Australian government bonds, which was flat over the quarter.
Source: Factset, data as of 12 April 2021.
Consequently, this change has translated to negative returns across defensive asset classes over the quarter which comprise predominantly these securities.
March 2021 marks one year since financial markets bottomed out as a result of Covid-19. As the virus spread internationally investor sentiment turned sour sending severe shocks through financial markets. Since then, we’ve seen a strong recovery in shares that ran up until the end of 2020 and pleasingly has continued through the first part of 2021.
The chart below illustrates the depth and speed of the sell-off which occurred when the pandemic hit and the subsequent recovery rally which occurred over the following 12 months.
Source, FactSet, data shown to 12 April 2021
smartMonday members have benefitted from the recovery in growth assets and most Options have seen a significant performance boost from the recovery rally over the last 12 months. This effort has again placed smartMonday’s premix Option performance ahead of comparable super funds across medium and long-term time periods – In the table below green shading denotes smartMonday achieved a return that was higher than the SuperRatings median return.
We are pleased to report that four smartMonday super investment options, including our MySuper age 45 option, are in the top 25% of super fund option performance across, 1, 3 and 5 years. Noting that the average smartMonday member is 43 years of age, as of March 2021.
|Super Option performance as at 31 March 2021||1 Year %^||3 years p.a. %^||5 years p.a. %^|
|MySuper age 45||24.5||9.4||10.1|
|Peer group median||18.7||7.3||8.3|
|High Growth - Index||32.2||10.3||10.5|
|Peer group median||28.6||9.5||10.2|
|Growth - Index||27.5||9.4||9.4|
|Peer group median||24.3||8.3||9.3|
|Balanced Growth - Index||22.1||8.3||8.2|
|Peer group median||19.3||7.2||8.1|
|Moderate - Index||8.6||4.7||4.4|
|Peer group median||7.9||4.2||4.6|
|Defensive - Index||4.1||2.3||2.0|
|Peer group median||3.6||1.9||2.2|
As a significant portion of the population in several developed economies should be vaccinated in the second half of 2021 its right to focus on life past the virus. After a number of false starts in 2020, the reopening of economies provides cautious optimism for further economic recovery.
In addition to positive vaccine news, the huge stimulus packages provided by key central banks and governments has delivered an accommodative environment for global economic growth. Although currently this support seems necessary, it may result in economies growing too fast and potentially overheating, giving rise to inflation.
The risks are threefold. Firstly slow or inefficient vaccine rollouts could extend existing lockdowns, or lockouts from international travel. This risk seems acute for continental Europe and emerging market economies. Second central bank resolve to keep interest rates stable may waiver. Finally international trade challenges, both politically and infrastructure led, continue to increase the cost and limit the efficiency of international trade. Despite these risks, on balance we believe the next phase can favour growth assets and moderate, yet volatile, returns are possible.
Comments current as at 30th April 2021