Low volatility income the key in a rebounding market
After over eighteen months under the shadow of COVID-19 lockdowns, Australians are taking our first vaccinated steps along the path to economic recovery. With New South Wales recently embracing its ‘freedom day’, and Victoria surging towards its own vaccination targets, our two largest state economies are finally poised to operate without the threat of snap lockdowns. National plans to reopen travel are being honed, and we look forward to interstate and even international travel becoming part of our lives again.
We recognise that lockdowns have an immediate and significant impact on economic activity. Fortunately, recent lockdowns in NSW and Victoria have not seen our economies plumb the depths witnessed in early 2020:
Based on weekly data for eg job ads, restaurant bookings, confidence, mobility, credit & debit card transactions, retail foot traffic, hotel bookings. Source: AMP Capital
The resilience of Australia’s economy is demonstrated by consensus expectations that a negative Q3 2021 GDP reading will be followed by a more positive read in Q4. We anticipate a rebounding economy into 2022, although not at the same rapid pace which in 2020 saw GDP rebound from -7.0% in Q2 to +3.6% in Q3. Steeled by red-lining fiscal and monetary policies, the performance of the Australian economy through 2020 and 2021 cannot be understated. Our GDP outcomes were among the strongest in the developed world, delivered by unified regulatory support and the firing of unprecedented fiscal jet engines:
Unemployment numbers have been a standout data set of the past 12 months. Where multiple commentators had anticipated double digit prints in 2020, unemployment peaked at just 7.4% before receding swiftly. At the end of August 2021 unemployment was at the extraordinarily low rate of 4.5%. An employed population of course boosts consumption and market confidence. Importantly, each employed person also represents a taxpayer contributing to national revenues, which will be critical in the years ahead.
It is a testament to the robustness of the entire economy that unemployment is uniformly low throughout all states and territories. These low numbers represent people in work right across Australia, earning incomes and supportive of local economies around the country.
As we look towards 2022 the themes of inflation, ongoing low interest rates, and market volatility are loudest among the public discourse. These concerns are legitimate. Many self-directed investors and retirees experienced stagflation first-hand, and a two-decade period of high inflation through the 1970s and 80s.These same investors who paid home loans at 20% pa are now trying to earn an income with interest rates at all-time emergency lows. Market volatility remains elevated and sits above pre-pandemic levels.
A narrative of strong household balance sheets, low interest rates and low unemployment tells of a locked down populace again ready to realise latent demand. Investors are right to ponder if the sheer volume of rebounding consumption has awoken the inflation genie.
Inflation can be imported, and international drivers can impact local outcomes. When these influences adversely impact cost or productivity, they not only encourage inflation, but coalesce towards the threat of secular stagflation. Consider the following three factors, each either increasing input costs or detracting from productivity:
- A recent surge in the price of liquified natural gas increasing the cost of energy
- Skyrocketing shipping rates increasing cost and creating delays
- The increasing price of semiconductors impacting the cost and availability of technology
Fortunately, we are in great shape to meet challenges like these with rebounding economic growth, low unemployment and strong household balance sheets. Our capacity to meet short term volatility is further bolstered by the synchronized position between our governments and regulators.
As the global economy emerges from a 1-in-100-year event volatility is inevitable, and places those nearing or in retirement at particular risk. Portfolios must be constructed with allocations to inflation responsive assets which offer low-volatility income.
*Michael Watson is Executive General Manager - Head of Distribution for the Asia-Pacific region at La Trobe Financial, an AIA sponsor.
La Trobe Financial’s national team of business development managers and Asset Management professionals have remained on station throughout 2020 and 2021, and can be contacted on 1800 818 818.
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