Economic e-news – May 2021
17 May 2021
It has taken the Australian stock market 14 months to recover and breach the previous record high struck just before the pandemic hit. LGS Chief Investment Officer Craig Turnbull explains.
Stock market sets record as dividend payouts improve
Government spending, low interest rates and a bullish outlook for iron ore prices helped drive the Australian stock market to a record high this month.
Australia’s handling of the pandemic, strong employment figures and relatively high dividend yields have also helped fuel the market, leading to greater returns for members’ superannuation.
The S&P/ASX 200 had been hovering near its all-time high for weeks before finally pushing through to peak at 7172.8 points.
It took the benchmark 14 months to recover and breach the previous record high of 7162 points struck in February 2020 – just before the pandemic hit. The local stock market has since given up some of its recent gains, ending little changed over the month as US inflation fears have sparked a global equity sell-off.
However, over the past 14 months, the index has risen 54 per cent since hitting its 2020 low of 4546 points.
Despite the pandemic, the government was able to paint a strong economic picture in the May Budget. The government expects the economy to grow by 4.25 per cent in 2021-22. Unemployment is tipped to fall below 5 per cent by late 2022 and should hit 4.75 per cent in 2022-23. The LGS Budget Bulletin has more details.
The Reserve Bank had previously also upgraded its economic forecast for GDP to 4.75 per cent over 2021, up from 3.5 per cent predicted in February. While the central bank expects the unemployment rate to drop to the 2008 low of 4.5 per cent next year, it remains adamant that the official cash rate will stay at 0.1 per cent until 2024 to help fuel wages growth.
“The broad-based nature of the upswing is in line with housing demand being supported by low interest rates, government support programs, a positive outlook for employment, potentially some pent-up demand during the pandemic and the increase in savings over 2020,” the RBA said in its quarterly statement of monetary policy.
While some challenges surfaced concerning delays in the rollout of COVID-19 vaccination, outbreaks of the virus and withdrawal of government stimulus, the performance of the equity market proved resilient.
A deep and immediate cut to dividend payouts in response to the early days of the pandemic proved short lived. Dividend payouts began to recover as illustrated by half-year earnings results from three of the four big banks in recent weeks.
The drop off in dividends in 2020 was a significant blow to the income of investors and super fund members. The banks are a popular choice because of their traditional high dividend yield and franking credits.
Super funds now stand to benefit with increased dividends flowing from companies in the banking and resources sectors.
Confidence in the economy has been further underpinned by surging residential property prices as investors return to the market, lured by low interest rates.
The Australian Bureau of Statistics said new home loan approvals for investors rose almost 13 per cent to $7.8 billion. Overall, the value of new home loans soared to a record high of $30.23 billion, up $10.76 billion year-on-year.
Separately, CoreLogic data showed that in the three months to April, national home values rose 6.8 per cent, the highest quarterly growth rate since December 1988.
Many ASX companies benefit from housing market activity -- not only the banks who finance it, but also building materials companies and consumer appliance retailers. This increases company earnings and can lead to higher stock prices, which also benefit super funds.
No one likes to think about it, but it’s important to plan who your assets would go to if something was to happen to you. You may have a will in place, but did you know it doesn’t automatically cover your super? Complete a binding death nomination form to ensure your super ends up where you want it to.
The 2021-22 Federal Budget included a series of measures favourable to super fund members. Local Government Super’s Budget Bulletin highlights the key initiatives announced by the government.
LGS has partnered with Keep It Cool to plant 300 native trees across the Snowy Mountains region.
Keep It Cool is a not-for-profit organisation that uses volunteer community days to plant trees, offsetting greenhouse gas emissions of locals and visitors to the region.
LGS has been supporting similar initiatives and has planted 12,800 trees in eastern Australia in the past three years alone. These carbon offsets equate to taking 800 cars off the road for one year.
Thank you for being part of a super fund that’s committed to providing a better future for everyone.
Watch the video here.