Fat Prophets > Australasian Equities > Income Report – May 11, 2021

Income Report – May 11, 2021

June 19, 2021 FAT-AUS-1019

Twenty years in the making

Global equities mostly advanced further in the first quarter of 2021, marking the fourth straight quarter. The gains came on the back an accelerating vaccine rollout, a strong outlook for a global economic rebound this year and continued accommodative measures from governments and central banks. Most of the pain was felt in the bond market, with yields rising on the rapid vaccine rollout in the US and UK and expectations of further US stimulus, which was forthcoming. Australian shares edged up in the first quarter and have since pushed higher to a new record high on Monday (yesterday), driven by the twin engines of banks and resources – more on that later.

US President Biden signed into a law a massive $1.9 trillion relief bill, keeping money flowing through the economy. Not to be left out, the European Parliament approved a €672.5 billion Recovery and Resilience Facility to provide grants and loans to help EU countries mitigate the impact of the coronavirus pandemic. In Australia, where the pandemic was contained much better than in most countries, stimulus is set to wind down in 2021 as the economy has rebounded strongly. Australian equities edged higher in the first quarter

Massive stimulus, significant pent-up savings and supply-chain disruptions though have combined to prompt inflationary fears around the globe. Although the most closely followed surveys in major economies have only shown inflation reaching modest levels to date purchasing manager indexes and commentary from a raft of companies implies we are on the cusp of a period of higher inflation. Whether this will be transitory as some suggest (with the Fed being a key player maintaining that view), or not remains to be seen.

Now in May, we have seen most companies around the world post better-than-expected first quarter results. In the US reporting season, Refinitiv estimates S&P500 first quarter earnings to date are up 50% year-on-year, marking the highest growth rate since the first quarter of 2010. Companies are bouncing back stronger than anticipated, not only in the US and but in many locales, including in Australia. Country and regional GDP forecasts have been revised upwards.

At the US Fed’s meeting in April, easy monetary policy was maintained, and the central bank signalled it isn’t in a rush to change that. Last Friday’s disappointing non-farm payrolls report dampened expectations of any hikes in interest rates sooner than the market was expecting. The US economy expanded at an annualized 6.4% pace in the first quarter of 2021 according to an advance estimate and that followed on the heels of 4.3% growth in 4Q20. The 1Q21 increase was the biggest first quarter growth rate since 1984. For the year, economists polled by Reuters estimate US growth could top 7% this year, which would also be the fastest since 1984 and follows on the heels of the 3.5% contraction in 2020, the worst performance in 74 years. This is important for the global economy and hence Australia and stock markets.

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