Economic e-news – March 2021
15 March 2021
It has been a volatile month for Australia’s financial markets amid a solid earnings season, LGS Chief Investment Officer Craig Turnbull explains.
Market Volatility Dominates Amid Bumper Earnings Season
The Australian dollar hit a three-year high, yields on 10-year bonds spiked to 1.96 per cent on emerging inflation fears and the stock market gave up most of its gains for the month despite a bumper earnings season.
There are a lot of developments which all have a bearing on superannuation and investment returns, starting with strong earnings and improved dividend payouts from many ASX-200 companies that have renewed optimism after the pandemic-induced slump.
Solid earnings season
While Australia is typically a high dividend-yielding market, businesses began cutting or suspending dividends last year to preserve cash during the pandemic. However, in the latest earnings season, Australia’s corporate sector began reinstating more generous payouts as the ratio of companies beating profit expectations – compared to those missing them – began to rise.
This resurgence comes about as we enter new economic and market cycles with earnings still below pre-COVID-19 levels. However, as we start to emerge from the downturn, cost cutting, combined with a recovery in revenue, are boosting the bottom line.
The improved corporate earnings are also being driven by wage subsidies, record low interest rates, fewer travel and entertainment expenses, and lower office costs as many employees continue to work from home.
CommSec estimates that around 79 per cent of companies issued a dividend, and aggregate dividends are up by 5 per cent on a year ago. Company dividends form part of your superannuation returns and many Australian dividends bring franking credits that boost your after-tax returns.
Overall, the recovery has been faster than expected and businesses are in good shape with strong balance sheets.
Bond yields spike
Amid all this good news, inflationary fears emerged causing bond yields to spike globally, rattling the stock market in the process. The ASX 200 has come off its recent high of around 6900 and is now trading close to 6700 points.
The yields on 10-year bonds have been rising on this wave of confidence, coming off a low of 0.7 per cent last year to around 1.80 per cent. The jump in yields comes in the wake of stronger economic growth and expectations of higher inflation over the medium term. This stems from optimism around the vaccine rollout, government stimulus and low official cash rates around the world.
Higher bond yields can provide an opportunity for slightly higher returns for defensive options (Balanced and Conservative) once yields have settled down. Unfortunately, however, cash yields remain at a record low level.
There was further market buoyancy after Congress approved US President Joe Biden’s US$1.9 trillion economic rescue package, providing optimism for a global economic recovery.
At the same time, a surge in commodity prices drove the Australian dollar higher when it briefly broke through US80c for the first time since February 2018, before gravity took hold and dragged it back to its current level around US77.50c.
The local unit is still being supported by improved sentiment driven by the arrival of the COVID-19 vaccine in Australia, expectations that interest rates could increase sooner than expected, and robust business confidence that has risen to decade highs as sales, profits and employment bounce back.
On top of that, and at a macro level, the economy is improving. Australia's unemployment rate is falling, and a minimal number of coronavirus cases means consumers are shopping. Australians are also no longer travelling overseas so people are redirecting funds towards consumer goods, home renovations or even new cars. Although, current wages growth of 1.4 per cent remains the lowest on record and is taking some of the heat out of the inflationary pressures spooking investors.
Australia’s gross domestic product surprised the market on the upside by growing 3.1 per cent in the December quarter, following a 3.4 per cent increase in the September quarter. As a result, the Organisation for Economic Co-Operation and Development upgraded Australia’s 2021 economic growth forecast to 4.5 per cent from the 3.2 per cent estimate made in December 2020.
The stronger economy and moves in the bond market are prompting financial markets to bring forward their expectations of a rate rise. Although Reserve Bank governor Philip Lowe says wages growth needs to be “materially” higher before official interest rates go up. The central bank maintains that interest rates will remain near zero until 2024.
LGS certified carbon neutral through Climate Active for second consecutive year
At Local Government Super we believe the best way to influence the behaviour of others is to set an example and adopt a green office policy by applying more energy-efficient practices in the workplace.
Whether it be the use of organic waste bins for kitchens, consolidating and digitising our member paperwork, or the responsible disposal of hardware and e-waste, LGS is striving to make the world a better and more sustainable place.
In recognition of our efforts, LGS has been certified carbon neutral by Climate Active for the second consecutive year and we are one of only five Australian super funds to actively hold this certification. The certification includes all LGS employees, the Sydney head office and the fund’s seven regional offices.
LGS has met all the requirements of the Climate Active Carbon Neutral Standard and closely measures emissions, reducing them where possible, or offsetting them and publicly reporting the results.
LGS Chief Executive Officer Phil Stockwell
Local Government Super supports effective, fair and equitable access to COVID-19 vaccines around the world. As one of almost 150 signatories to the Access to Medicine Foundation, LGS is helping to encourage world leaders to finance and to deploy adequate funding to ensure fair and equitable access to COVID-19 vaccines, medicine and diagnostics globally.
Phil Stockwell, Chief Executive of LGS, says: “As an investor in healthcare companies and social bonds, LGS has signed this statement endorsing its alignment with the Access to Medicine Foundation. Equitable funding promotes faster and more widespread eradication of disease which is vital in accelerating a global economic recovery that benefits our members and their future.”
LGS is marking 20 years since becoming the first Australian super fund to stop investing in tobacco. In 2001, LGS divested all of its holdings in tobacco, establishing the super fund as a pioneer in responsible investment.
The exclusion of tobacco in investment portfolios is considered a fundamental step when it comes to responsible investment and underscores LGS’ strong commitment towards achieving a tobacco-free world.
Phil Stockwell, LGS Chief Executive, says that along with the direct health effects on those who choose to smoke and the associated health costs to society, there are other factors to consider when it comes to the tobacco industry.
Find out more about LGS’ tobacco-free status.
Councillor Declan Clausen
Local Government Super has announced the appointment of Councillor Declan Clausen to the Board of Directors, effective 26 March 2021.
Cr Clausen will fill the Board seat left vacant by LGS Deputy Chair Bruce Miller, who is stepping down after serving nearly 11 years on the Board. The role of Deputy Chair will be filled by sitting Board member Cr Karen McKeown.
Cr Clausen, who is an employer-nominated board member, has been the Deputy Lord Mayor of Newcastle since 2017 and is the fourth director to join LGS in the past 18 months, adding to the depth of expertise and diversity sitting on the Board.
Find out more about the LGS Board appointment.