Global share markets were mixed over the last week with concerns about the impact of rising bond yields on equity market valuations, particularly for high PE tech stocks, weighing on confidence
22 February 2021 | Shane Oliver, AMP Capital (Image: Marcus Reubenstein)
For the week US shares fell -0.7%, Eurozone shares gained 0.2%, Japanese shares rose 1.7% and Chinese shares fell -0.5%. Australian shares were boosted early in the week to their highest level in nearly a year by strong earnings, but reversed course to end the week down -0.2% as concerns around rising bond yields weighed with the week seeing sharp falls in utility, consumer staple, real estate, industrial and energy stocks.
Bond yields rose further as did metal and iron ore prices, but oil & gold prices fell. The $A surged decisively through $US0.78 making it to its highest since March 2018 as metal prices rose and the $US fell slightly. Crypto mania continued with more jumping on the Bitcoin bandwagon.
The bond sell-off gathered pace again over the last week, raising fears about collateral damage to equity markets. From their lows in March-April last year 10-year bond yields have now increased by around 0.8% in the US and Australia. The rebound has been driven by increasing confidence in economic recovery helped by optimism that vaccines will allow a sustained reopening spurred along by policy stimulus with an emerging concern that US fiscal stimulus will cause overheating and much higher inflation ultimately forcing the Fed to tighten earlier than planned.
Overall, I am not too fussed, but bond yields could still go a lot higher in the short term before they settle down again and this could cause a correction in equities. But the big picture backdrop of still low underlying inflation and spare capacity in jobs markets combined with economic and profit recovery and low interest rates is a positive one for growth assets particularly shares and this includes the Australian share market. Meanwhile it’s kind of odd to think that only a year ago investors were worried about depression and deflation and now they are worried about overheating and inflation!
COVID-19 infections ease
The downtrend in new global coronavirus cases continued over the last week with the daily number of new global cases running around half its January high. The decline has been particularly sharp in the US, Europe, UK, Japan, Canada and South Africa. Deaths are following new cases lower.
The decline in new cases largely reflects lockdowns doing their job, but the roll out of vaccines is continuing to gather pace. 46% of Israel’s population has now received one dose of vaccine, 24% in the UK and 12% in the US. While concern about new mutations remains, indications are that vaccines will still be highly effective in preventing severe cases, hospitalisations and deaths and so will still allow sustained reopening.
Our view remains that the US will reach herd immunity around mid-year, most developed countries including Australia will reach it by the December quarter with most emerging countries in first half next year.
Australia remains well placed
New coronavirus cases remain very low in Australia, with Victoria’s snap 5 day lockdown able to end on schedule as local transmission has been very limited. This is consistent with the experience from snap lockdowns in Queensland and WA and suggests they are working as circuit breakers and maybe that the new variants are not as contagious as feared (best to be cautious though).
While our Australian Economic Activity Tracker dipped a bit over the last week reflecting Victoria’s snap lockdown, it remains relatively strong and is likely to resume its upswing as the lockdown was brief. Our rough estimate based on past lockdowns is that the Victorian lockdown cost the economy around $700 million – but this is likely to prove too pessimistic as 2 days were on the weekend, Australians have adapted to lockdowns such that they are now less economically disruptive and the brief nature of the lockdown would have meant less lasting damage and encouraged a strong bounce back helped by pent up demand.
Our US Economic Activity Tracker was little changed and remains softish & still down from its September high. And our European Economic Activity Tracker rose slightly again over the last week but remains very weak.
Corporate profits rebound
The Australian December half earnings reporting season is now about 60% complete by companies and nearly 80% complete by market capitalisation with the clear message that profits are rebounding strongly from the lockdown impacted June half last year with this driving a rapid rebound in dividends. So far 57% of companies have seen profits rise which is up from just 36% six months ago, 53% have beaten expectations compared to just 32% six months ago and 53% have increased dividends compared to 55% cutting dividends six months ago. Notably the banks have been pushing dividends back up as they reduce bad debt provisions and the big miners have announced record dividends.
Consistent with the strong rebound in profits, more beats than misses and positive guidance earnings consensus expectations for earnings growth in 2020-21 has now been revised up to 29%, up from +21% a month ago. Resources companies have seen the biggest upgrades and are expected to see 50% earnings growth this year which explains the record dividends from BHP and Rio. Expected 2020-21 earnings growth for banks has now been revised up to 34%, with industrials expected to see 5% earnings growth led by IT, health, media and other material stocks.
Dr Shane Oliver is Head of Investment Strategy and Chief Economist, AMP Capital