Economic and market snapshot - March 2021

As we closed out 2020 it was clear that the COVID-19 health crisis was far from over.

Vaccine rollout shapes the path to reopening and economic recovery

The first few months of 2021 saw an upward trend in COVID-19 infections, particularly in mainland Europe and various South American countries. India, where the problem of accurately classifying COVID-related deaths has been particularly acute, had a dramatic spike in infection rates and, tragically, a significant death rate as hospitals became overwhelmed with cases. India’s devastating second wave highlights the possibility of more deadly and transmissible COVID mutations, which may disrupt the progress made by current vaccines.

Progress on the vaccine rollout was always set to be the central feature of economic reopening in 2021. While over 170 countries have started their COVID-19 vaccine programs, there is huge disparity in the rollout programs and levels of reopening with some emerging countries that have high rates of infections well behind.

The UK has led the way to reopening with the government stating that the country is on track to offer a first dose to all adults by the end of July 2021. In the US the rollout has been delivered rapidly with the very effective mRNA vaccines dominating the rollout. Confidence in reopening has improved with around 30% of the population already receiving one dose, a good sign when given how the US was tracking before their program started. In contrast, Europe remains plagued by a slower rollout than other developed countries with concerns over the AstraZeneca vaccine and ties to rare blood clots persisting. Australia’s program is also lagging with signs that confidence in some vaccines has waned.

While vaccine rollout issues may continue, including supply and distribution, and levels of effectiveness, these challenges should ease in time, allowing economies to reopen and keep the unfolding global recovery on track.

Inflation expectations lift but rates are unlikely to rise any time soon

Economic optimism has also been boosted by the passing of US President Biden’s USD $1.9 trillion stimulus package. We expect this will support consumer spending at a time when the US economy is already gaining momentum. In March 916,000 jobs were added, a figure that points to reopening and economic improvement and we expect this upward trend will continue.

In global news, the Global Composite PMI survey, a key indicator for economic activity, rose to a near seven-year high in March, suggesting the global economic recovery remains confidently underway, although likely peaking.

The more upbeat global economic outlook saw investors have more confidence in growth assets, like shares, which have powered ahead on the back of upward revisions to the earnings outlook. Conversely, investors fled from defensive assets, resulting in a huge sell-off in bond markets in February.

Increased economic confidence has led to concerns that inflation will rise, and that central banks, such as the Reserve Bank of Australia and the US Federal Reserve, may start to taper their extraordinary monetary support going forward. Central banks have largely pushed back against these expectations as it’s actual inflation rather than expected inflation that’s of most concern and drives their policy outlook.

While inflation is likely to rise in the coming months, due to higher oil prices and the effects of the 2020 pandemic slowing, it’s expected that any spike will be temporary and central bankers want evidence that there’s a sustained upward shift supported by a continued fall in unemployment before raising rates. However, the quantitative easing programs could be eased some time before rate increases commence. Overall, we expect central banks to keep monetary policies ‘loose’ to further support the economic recovery and jobs.

What may be ahead?

The COVID-19 pandemic intensified trends that had been in place for some years, such as online retail sales, as more people were working and shopping from home. This saw growth stocks, primarily in the technology sector (including the ‘FAANG’ stocks - Facebook, Amazon, Apple, Netflix and Google), see huge gains in 2020.

In 2021 economies are beginning to heal and we’ve seen elevated returns from value stocks, such as banking, which tend to benefit most from reopening. While returns are unlikely to continue at the high levels we’ve seen in the year to date, we consider returns should remain robust going ahead as economies reopen and jobs recover.

If you’d like guidance on making the most of this new phase in the economic cycle to secure your financial future, please speak to a financial adviser or contact us.

Source: IOOF Investment Services Ltd

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