May 2021 Review - Economic Recovery continues to support equity markets

Updated: Feb 24


  • Economic data continued to re-enforce a positive outlook for earnings growth, supporting further appreciation on share markets.

  • Sectors more exposed to the economic cycle outperformed in May, whereas the less cyclical sectors such as utilities and I.T. posted negative returns.

  • Bond and currency markets were relatively steady over the month.


International Equities

The re-opening of economies across Europe and the U.S. has provided solid economic data and maintained positive investor sentiment towards equities. This is particularly the case in the United Kingdom where a rapid vaccination take-up. During May, the UK's share

market advanced 4.0%, following a 4.1% gain in the previous month. Continental Europe also outperformed the broader global average, with Germany 's share market producing a 2.6% return. Gains in the U.S. were more subdued at 0.9%, with the Information Technology sector weighing on returns. The Japanese share market continued to produce no growth and is now 3.0% lower for the past quarter, as the economy continues to show less evidence of recovery than elsewhere.


Share markets in emerging economies outperformed developed markets last month, largely due to a sharp rise in the Chinese equity market of 5.6%, thereby reversing some

performances in Eastern Europe and Brazil as rising commodity prices

(including oil) supported these markets.


Australian Equities

Australia outperformed the global average last month, with the S&P ASX 200 Index rising 2.3%. The major banks led the market, with CBA’s12% increase making a major contribution following a positive March quarter trading update. Banks are benefiting from a strong housing market, with new housing finance commitments hitting a record high in April to be 68% above the levelrecorded one year earlier. Also making a positive contribution to the Australian market last month was the resources sector (up 1.3%) as commodity prices continued to escalate. In recent months, there has been a strong focus on those commodities that will benefit from higher demand for renewable energy and the electrification of motor vehicles. Copper has been one of these commodities, appreciating in price by 37% over the past 6 months.


Consumer discretionary stocks continued to enjoy strong support, underpinned by buoyant consumer spending and a strengthening domestic economy. National Accounts data showed that the Australian economy expanded by 1.8% in the March quarter, to bring the annual rate of economic growth to 1.1%. Economic output is now 0.8% above the level recorded in December 2019 (which was the final quarter unaffected by the COVID-19 crisis). This growth has been associated with healthy consumer spending, which has seen consumer discretionary stocks being the strongestsector over the past year, with a 47% gain. The economic recovery has also supported the property trust sector (up 1.7%), with the outlook for shopping centre and office rentals improving in line with higher retail sales and employment growth. However, not all sectors produced gains over May. After rebounding in April, Information Technology wassold off again last month, with a 9.9% decline. Concerns over elevated valuations and the potential impact of higher inflation and interest rates on these valuations has dented support for the sector. Utilities also experienced price decline (down 6.6%), now standing out as the only negatively performing sector in the market over the past year. Being less sensitive to broader economic cycles, utilities have failed to attract investor support in recent times.


Fixed Interest & Currencies


Despite the ongoing evidence of economic recovery, and the confirmation in May of the Australian government’s ongoing large budget deficit, Australian bond yields have declined from their February peak. During May, the Australian 10-year bond yield dropped marginally by 0.04% to 1.61%. The equivalent yield in the U.S. remained close to the Australian yield at 1.58%. The loss of the upward momentum in bond yields over the past quarter is likely to reflect a consensus view that inflationary pressures being experienced currently will prove to be “transitory” and not result in a material structural shift away from the low inflationary environment, which has prevailed over much of the past 2 decades.


The Australian dollar continued to hover in the U.S. 77 to 78 range, closing the month at US 77.3 cents. This recent stability in the $A belies the trend in commodity markets, where higher prices are often associated with a rising $A.


Important Information

The following indexes are used to report asset class performance: ASX S&P 200 Index, MSCI World Index ex Australia net AUD TR (composite of 50% hedged and 50% unhedged), FTSE EPRA/NAREIT Developed REITs Index Net TRI AUD Hedged, Bloomberg AusBond Composite 0 YrIndex, Barclays Global Aggregate ($A Hedged), Bloomberg AusBond Bank Bill Index, S&P ASX 300 A-REIT (Sector) TR Index AUD, S&P Global Infrastructure NR Index (AUD Hedged).


General Advice Disclaimer

This document has been prepared by Sage Advisers (AFSL 238039). Any advice provided is of a general nature and does not take into account personal circumstances. Any decision to invest in products mentioned in this document should only be made after reviewing the relevant Product Disclosure Statements. Should the reader wish to avail of using the above investment philosophy they should only do so firstly seeking personal financial advice through a financial planner. Past performance is not a reliable indicator of future performance.

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