Monthly economic update with MLC, January 2021

Funds Management

by Clive Tompkins

MLC Asset Management Senior Economist Bob Cunneen discusses the global shares' negative return for January, the Australian market's surprise gain, and the outlook for 2021.

Why did global shares deliver a mild -0.2 per cent negative return for January?

Global share markets delivered a mildly negative return of minus 0.2 per cent for January. And, basically, after the strong recovery that we had late last year, global share markets have taken a bit of a pause at the moment.

Now, there are a couple of mixed performances in global share markets in particular. What we saw in the case of the United States share market, it fell about 1 per cent. Of particular concern is obviously the political risk in Washington that we had early in January with the January 6 Washington riots. We also had the House of Representatives impeaching President Trump.

Now, on the positive side of the ledger, we did see an announcement from the new President, Joe Biden, of a US$1.9 trillion rescue package for the US economy. So, that was seen as a positive.

We also saw virus concerns dominate, particularly in Europe. So, what we're seeing with the European economies is a lockdown situation and curfews, and this has weighed heavily on European shares, and they were down approximately 2 per cent if you looked at the German share market.

Against that, the Chinese share market surprised on the upside with a very strong 8 per cent gain. And that largely reflects the strength of the Chinese economy.

How is the global economy performing?

The global economy appears to be multi-speed and mixed currently. If we looked at the American economy, we had a strong recovery in the middle of last year, but at the end of 2020, that recovery started to moderate with the virus surge. So, what we're seeing is jobs growth and retail spending at the end of December start to fade.

By contrast, the Chinese economy's doing extremely well. We saw very strong growth at the end of last year, plus-6 per cent pace. The key concern at the moment is Europe. So, with the curfews and the lockdowns that we're seeing, we saw both the French and Italian economies contract at the end of last year. So, Europe remains a concern.

Why did Australian shares positively surprise with a 0.3% gain?

Australian shares provided a mild positive surprise with a 0.3 per cent gain for January. Now, the key positives was the performance of consumer stocks, which were up between 2 per cent and 4 per cent, and financial sector shares, which were up approximately 2 per cent. Now, this was driven by the view that the Australian economy looks much better entering 2021. And, in particular, Consumer looks much healthier with the solid job gains and the improvement in employment prospects likely.

Against that, we did see weakness in Real Estate Investment Trusts, which were down about 4 per cent, and the Health Care sector was down nearly 2 per cent. So, all in all, we only saw a mild gain for Australian shares, but it was a positive for January.

How is the Australian economy travelling?

The Australian economy seems to be entering 2021 with very positive prospects. We've seen a lift in business and consumer surveys. We've also seen very strong job gains at the end of 2020. And this is largely on the back of the low interest rate settings by the Reserve Bank, as well as the extensive support by the Federal Government in terms of fiscal stimulus, in terms of the JobKeeper program in particular, which has supported the Australian economy. We have also seen signs that the virus outbreaks, both in Sydney and recently in Melbourne and Perth, have been contained. So, these are all positive signs that Australia is doing much better than what was the case early 2020.


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