Monthly economic update with MLC, July 2021

Funds Management

by Clive Tompkins

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MLC Asset Management Senior Economist Bob Cunneen discusses factors behind the mixed performance of global share markets over July.

Global share markets delivered a very strong +2.8 per cent gain in July, but this largely reflected the weakness in the Australian dollar, which fell around 2 per cent against foreign currencies. In local currency terms, global shares were up around 0.7 per cent. There were a couple of strong performances. In particular, American and European share markets made new record highs. And this is on the back of very strong vaccination rates in America and Europe. So, if you looked at the United States, the percentage of the population that had received one vaccine dose is now approaching 60 per cent, and in Europe it is now more than 50 per cent. The other positive factor has been a very strong performance in terms of corporate profits. So, if you looked at the American shares in terms of corporate profits, they're up nearly 85 per cent over the past year. However, there were some disappointing share market returns, particularly in the Asian market. So, if we look at the Chinese share market, it fell about 14 per cent in July. And this reflects increased scrutiny by the Chinese government over education and technology companies. There were also disappointing returns over Japanese, Indonesian, and Thai share markets, and there were falls between 2 per cent and 5 per cent. And this largely reflects concerns about rising virus cases in these Asian countries.

Currently, the global economy is delivering a multi-speed performance. Generally, there is a global recovery. However, some countries are clearly doing better than others. So, if we looked, in the case of the United States and Europe, they are now posting very strong recoveries, and we're seeing this in terms of employment, as well as business and consumer surveys have been very positive. However, some countries are still struggling with the virus, and that's particularly apparent in Asia.

Australian shares delivered a solid 1.1 per cent gain in July. And this was largely on the back of a couple of sectors. In particular, the mining sector did extremely well, with a +8 per cent return. And this was on the back of very strong metal prices as well as a weaker Australian dollar boosting foreign currency revenue. There were also very strong gains for the industrial sector. So, the industrial sector was up around 4 per cent. And this largely reflects the low interest rate settings by the Reserve Bank, which is very supportive of the share market. However, there were some disappointing sectors. In particular, the energy sector fell about 2.5 per cent. And this is just essentially a correction to the strong returns that we've seen this year.

The Australian economy has posted a solid recovery in the first six months of the year. However, this recovery is now being challenged by the virus outbreaks we are seeing in the major capital cities, in particular Sydney and Melbourne. So, since the start of July, we have seen softer readings for business confidence, consumer confidence, as well as weekly employment. So, it looks like the Australian economy is struggling at the moment to try and contain this virus and to maintain a recovery profile. However, we do have support coming from the Reserve Bank settings of very low interest rates, continued bond purchases, as well as providing extra liquidity to the banking system. Also, both Federal and state governments have increased their budgetary support for the business sector and consumers. So, this would indicate that once we contain the virus, the Australian economy is set to return to the recovery profile.


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