The return of geopolitical risk? - what to watch over the remainder of 2021

The attached note takes a look at the importance of geopolitical risk for investment markets and key geopolitical risks to watch over the remainder of 2021.

The key points are as follows:  

• Geopolitical issues generate much interest, but don't necessarily have a significant impact on markets.

• But geopolitical risks are higher than prior to the GFC reflecting three big themes: a populist backlash against economic rationalist policies; the falling relative power of the US; and the polarising impact of social media.

• After a lull following the transition to President Biden, key geopolitical issues to watch this year are: US and Australian tensions with China; Iran/Israel tensions; Russia and Ukraine; the German election; US tax hikes; and a possible early Australian election.

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Learning the lessons of an extraordinary year of 2020

With some distance now between us and the year that changed everything, we look back and consider what we’ve learned from 2020 and reasons for optimism for the rest of this year.

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Shares have had a very strong rebound since March last year so where are we in the investment cycle?

With shares coming up to the one year anniversary of their pandemic lockdown driven lows on 23rd March 2020, the attached note takes a look at where we are in the cyclical bull market in shares and the broader investment. The key points are as follows:

• The history of cyclical bull markets in shares suggests that the rebound since last March still has a way to go.

• But it’s normal for the second 12 months of a cyclical bull market to see slower returns from shares.

• While shares are vulnerable to a further correction triggered by the spike in bond yields, we are not seeing the sort of unambiguous overvaluation, economic overheating, monetary tightening and investor euphoria normally seen at cyclical tops.

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Market outlook Q&A – global recovery, vaccines, inflation, the risk of a share crash, Aust house prices and other issues

The attached note takes a look at the main questions investors commonly have regarding the investment outlook in a simple Q&A format.

Some of the key points are as follows:  

• Global recovery is on track. Vaccines are working.

• JobKeeper’s end won’t derail Australia’s recovery.

• Inflation could become an issue in the medium term.

• Shares are at risk of a correction but are supported by economic and earnings recovery.

Australian house prices are booming again but expect measures to slow it down in the months ahead.

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The bond crash of 2021? Seven things for investors to consider

The attached note takes a look at the upswing now underway in the bond market.

The key points are as follows:  

• Higher bond yields are normal in economic recovery and should not be a major problem for shares if they are matched by rising earnings. But too rapid a rise in bond yields risks driving a deeper correction in shares.

• Central banks want higher inflation but will look through any short-term spike.

• The 40-year downtrend in inflation and bond yields is likely over.

• But the fundamental backdrop of improving growth, rising profits and still low rates supports the case for solid 6-12 month returns from shares.

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Nine common mistakes investors make

The attached note takes a look at the nine most common mistakes investors make.

The key points are as follows:  

• Many of the mistakes investors make are based on common sense rules of thumb that turn out to be wrong

• As a result, it’s often wise for investors to turn common sense logic on its head.

• The easiest way to avoid many of these mistakes is to have a long-term investment plan that aligns your financial goals with your risk tolerance

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Seven key charts for investors to watch regarding the global economy and investment markets this year

Seven key global charts worth keeping an eye on by investors this year are:

• the trend in new coronavirus cases and deaths;

• global business conditions PMIs;

• unemployment;

• global inflation;

• bond yields

• the gap between earnings yields and bond yields; and

• the US dollar.

Click here to access these charts

2021 - A list of lists regarding the macro investment outlook

2020 turned out far better for diversified investors than had been feared when the pandemic hit, which triggered plunging market shares and deep recessions. The average balanced growth superannuation funds look like they have returned around 3%. This followed around 15% last year. Balanced growth funds returns have averaged about 7% per annum over the last five years, which is well above inflation and bank deposit returns.

The key points are:

• 2020 turned out far better for investors than was feared;

• 2021 is expected to provide solid returns and see a further rotation from pandemic winners to cyclical investments;

• Watch: coronavirus and vaccines; US politics; China tensions; inflation; and the hit to immigration in Australia.

Click here to read Oliver’s Insights, and views on the investment outlook.

Oliver's Notes: Nine keys to successful investing - and why they are more important than ever in the face of the coronavirus shock

The linked article takes a look at what Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital, sees as the nine keys to being a successful investor, and what impact the coronavirus shock has had on them.

Even in good times, successful investing can be stressful. For this reason, it’s useful for investors to keep a key set of things - call them rules - in mind.

The key rules are:

• make the most of compound interest;

• don’t get thrown off by the cycle;

• invest for the long term;

• diversify;

• turn down the noise;

• buy low and sell high;

• beware of the crowd;

• focus on investments offering a sustainable cash flow; and

• seek advice.

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US dollar breaking down, gold and the AUD breaking up - what does it mean for investors?

The current surge in gold prices is leading to a record high. The US dollar is falling, and the Australian dollar is rising. The key points of the attached note are as follows:

• The US dollar looks to have peaked, in part reflecting reduced safe haven demand with more downside likely.

• The gold price has broken out to a record high, reflecting a declining US dollar, investors demand for an inflation hedge and a fall in the opportunity cost of holding gold. More upside is likely.

• The Australian dollar has broken higher, reflecting the declining US dollar, along with higher commodity prices and it’s likely the trend will remain up.

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Australian economic and fiscal update - record budget deficits, but more to come

This economic and fiscal update is the first since December’s Mid-Year Economic and Fiscal Outlook when budget surpluses looked just around the corner. Since then things have changed dramatically due to the hit from coronavirus and necessary support measures from the Government.

The key points are:

• The Government expects the federal budget deficit to peak at a record $184.5bn this financial year. That’s around 9.7% of GDP, its highest since the end of WW2.

• Ultimately, we expect it to be around $220bn as the Government unveils more stimulus & revenue recovers more slowly than projected by the Government.

• The budget and associated debt blowout is unlikely to cause a major problem as public debt is relatively low, borrowing costs are very low, the Government is borrowing in $A’s & it’s not dependent on foreign capital. Letting the deficit rise is the right thing to do.

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Australian house prices starting to fall - collapse likely averted, but expect more weakness ahead

The attached note updates our analysis of the impact of the Coronavirus shutdown on the Australian housing market.

The key points are as follows:

• Australia capital city hoome prices fell by -0.5% in May, based on Core Logic data, with five of the eight capital cities seeing falls including Melbourne (-0.9%) and Sydney (-0.4%)

• Significant policy support and the earlier reopening of the economy have made our worst-case scenario for a 20$ decline in average Australian house prices unlikely.

• However, our base case is for home prices to fall around 5-10%, as “true” unemployment will remain high, government job and income support measures and the bank payment holiday end in September, immigration falls and new supply is likely to be boosted via government measures designed to support home building. Sydney and Melbourne are likely to be impacted the hardest, particularly given their greater exposure to immigration.

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Why super and growth assets like shares have to be seen as long-term investments

As we’ve seen recently growth assets like shares have periods of bad short-term performance versus bonds & cash. But they provide superior long-term returns which is essential to grow retirement savings. It makes sense for superannuation to have a high exposure to them.

The best approach is to simply recognise that super and investing in shares is a long-term investment

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The Coronavirus pandemic and the economy - a Q&A from an investment perspective

Along with the horrible human consequences, the coronavirus pandemic is having a huge impact on the way we live, and as a result, investment markets. This note provides a simple Q&A for most of the main issues from an economic & investment perspective.

• Significant government support is essential to enable parts of the economy to successfully hibernate;

• This will be financed by borrowing and is affordable, given Australia’s relatively low public debt and low borrowing rates;

• Central bank support to keep financial markets functioning properly is also essential and quantitative easing is part of this; and

• We are more likely to see a U-shaped recovery than a V or L.

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The plunge in shares – seven things investors need to keep in mind

Shane Oliver, Head of Investment Strategy and Chief Economist.

The attached note looks at the plunge in share markets over the last week. The key points are as follows:

• Share markets have fallen sharply on the back of coronavirus concerns.

• Shares may still have more downside and the uncertainty around the coronavirus crisis is very high, but we are of the view that it’s just another correction.

• Key things for investors to bear in mind are that: corrections are normal; in the absence of recession, a deep bear market is unlikely; selling shares after a fall locks in a loss; share pullbacks provide opportunities for investors to buy them more cheaply; while shares may have fallen, dividends are smoother; and finally, to avoid getting thrown off a long-term investment strategy it’s best to turn down the noise during times like this.

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From bushfires to Coronavirus - five ways to turn down the noise around investing

Shane Oliver, Head of Investment Strategy and Chief Economist

The attached note takes a look at the worry list for investors, which is currently focussed on coronavirus, and how to turn down the noise around investing. The key points are as follows:

• The coronavirus outbreak, while horrible from a human perspective, is just another of a long list of worries for investors.

• Our natural inclination to zoom in on negative news combined with a massive ramp up in the availability of information is arguably making us worse investors: more fearful, more jittery, more short-term.

Five ways to help manage the noise and turn down the worry list are: put the latest worry in context; recognise that shares return more than cash in the long-term because they can lose money in the short-term; find a process to help filter noise; make a conscious effort not to check your investments so much; look for opportunities that investor worries throw up.

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Five charts to watch regarding the global economy and markets this year

Shane Oliver, Head of Investment Strategy and Chief Economist.

The attached note looks at five charts worth keeping an eye on regarding the global investment outlook. The key points are as follows:

• Shares are at risk of a short-term correction or consolidation after a strong run over the last year and with sentiment now very bullish. However, this year should still see good returns for investors as global growth edges up and interest rates remain low.

• Five key global charts to watch are: global business conditions PMIs; global inflation; the US yield curve; the US dollar; and global trade growth.

• So far so good, with PMIs improving a bit, inflation remaining low, the yield curve steepening, the $US showing signs of topping and the US/China trade truce auguring well for some pick up in world trade growth.

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Review of 2019, outlook for 2020 – the beat goes on

Shane Oliver, Head of Investment Strategy and Chief Economist.

The attached note reviews what 2019 meant for investors and takes a look at the outlook for 2020. The key points are as follows:

• 2019 saw economic and profit growth slow, recession fears increase and the US trade wars ramp up, but solid investment returns as monetary policy eased, bond yields fell and demand for unlisted assets remained strong.

• 2020 is likely to see global growth pick up with monetary policy remaining easy. Expect the RBA to cut the cash rate to 0.25% and to undertake quantitative easing.

• Against this backdrop, share markets are likely to see reasonable but more constrained & volatile returns, and bond yields are likely to back up resulting in good but more modest returns from a diversified mix of assets.

The main things to keep an eye on are: the trade wars, the US election, global growth, Chinese growth, and fiscal versus monetary stimulus in Australia.

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Why super and growth assets like shares really are long-term investments

Shane Oliver, Head of Investment Strategy and Chief Economist.

The attached note looks at why super and growth assets like shares should be seen as long term investments. The key points are as follows:

• While growth assets like shares go through bouts of short-term underperformance versus bonds & cash, they provide superior long-term returns. It makes sense that superannuation has a high exposure to them.

• The best approach is to simply recognise that super and investing in shares is a long-term investment.

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Five reasons why I am not so fussed about the global outlook

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist.

The attached note looks at five reasons why I am not so fussed about the global outlook. The key points are as follows:

• There is no denying concerns about global debt, seemingly never ending QE, more debt trading on negative interest rates, inequality & geopolitical threats.

• However, some of these concerns are exaggerated and there are five reasons why I am not so fussed about the global outlook. In particular, there is good reason to expect a pick-up in global growth over the next 12 months. This should help underpin further gains in share markets over the next 6-12 months.

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