Monthly economic update with MLC, August 2021

Funds Management

by Clive Tompkins

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MLC Asset Management Senior Economist Bob Cunneen discusses factors behind the strong performance of share markets in August.

Global shares delivered a very strong +3.1 per cent return in August. It was notable that both the American and European share markets made record highs. So, what we're seeing in terms of the strength in the share market reflects the strong rebound in corporate profits. For example, FactSet estimates that US corporate profits were up more than 90 per cent over the past year to the June quarter. So, we've seen signs of a very strong American and European recovery. That's helped particularly by strong vaccination rates. It's also been helped by very low interest rate settings, which has compelled investors to stay involved in the share market.

The global economy appears to be in a solid recovery phase and particularly led by the American and European economies with their improved performance year to date. So, what we're seeing in most of the leading indicators for America and Europe is in terms of very solid business and consumer surveys and very solid GDP growth so far to June this year. However, we do see some mixed signs coming out of China. What we're seeing in terms of the Chinese retail sales and industrial production numbers, they have been on the soft side recently. And we've also seen a directive or guidance from the Chinese government -- in particular, increased regulation for education and technology companies. So, this has weighed particularly on the Chinese share market, which only delivered a flat return in August.

Australian shares delivered a strong 2.5 per cent gain in August, and this was essentially on the back of the very robust gains in the technology sector. So, we saw a $39 billion takeover bid for Afterpay (ASX:APT), which saw their share price surge. There were also some very solid gains out of the healthcare sector, which was up nearly 7 per cent, and the financial sector shares, which are up nearly 5 per cent. And this is on the back of guidance from the Reserve Bank that they would keep interest rates low. However, the resource sector disappointed, with a near 8 per cent fall in August. So, if we look at shares like BHP (ASX:BHP), Fortescue (ASX:FMG) and RIO (ASX:RIO), they were down between 10 per cent and 16 per cent in August. And this was on the back of the near 25 per cent fall in the iron ore price. And this comes with some guidance from the Chinese steel industry that they would have lower future demand for Australian iron ore.

Regrettably, the Australian economy is struggling currently, and the recovery that we've seen over the past year is now under question. So, if we look at the virus outbreaks that we've seen across the eastern states, particularly New South Wales, Victoria and the Australian Capital Territory, these have required lockdowns. And with that curtailment in terms of economic activity and mobility, it looks like the September quarter of this year will record a fall in gross domestic product. So, what we're seeing in terms of the leading indicators, the business and consumer surveys, as well as with the payroll data, indicates that the economy is now weak. So, we need to see higher vaccination rates, as well as continued support from both the federal and state governments, as well as the low interest rates settings by the Reserve Bank to support the economy in this difficult time.


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