17-02-2021
George Lucas, Raiz Group CEO
First to equities. The MSCI World Index, the broad global equity index representing large and mid-cap equity performance in all 23 developed markets nations, has risen around 6 per cent since COVID-19 vaccination programs started in early December.
Two things stand out here. One: the equity market rotation that occurred in November has stopped, with coronavirus-resilient sectors like IT and communication services among those best performing since early December. Two: the recent rise in the yield of 10-year US Treasuries has not halted the equity rally, despite a common belief that higher government bond yields are trouble for stocks.
Meanwhile, the market is pricing in less effective opening of the global economy than popular media would have you believe. Markets are pricing in an increase in inflation, with concerns that too much stimulus might ignite higher inflation.
Irrespective, in time, when it is clearer that it can reopen at a faster rate, we should see a rebound in the global economy and a boost to corporate earnings. We should also then see coronavirus-vulnerable sectors, such as energy, start to outperform again as they did in November.
At the same time, fiscal and monetary policy are set to remain accommodative for some time, underpinning further rallies in the equity markets.
Australian dollar set to rise against greenback
Turning to currencies, the Aussie and emerging market currencies should resume appreciating against the US dollar before long, even if yields of US government bonds continue to rise slightly.
After appreciating significantly against the US dollar in the second half of 2020, they have generally had a slow start to 2021, with most little changed or a bit weaker against the US dollar. This has been driven by the rise in US Treasury yields this year on the back of higher perceived odds of fiscal stimulus, and therefore inflation. This has seen the US dollar strengthen more broadly.
Also, it is unlikely now that interest rate differentials between Australia/emerging markets and the US will widen much further. We think US yields will only rise slightly, if at all, rather than surging as in the 2013 “taper tantrum”. This will limit downward pressure on currencies against the US dollar.
More important, investor appetite for risk is likely to remain strong amid the backdrop of a rapid economic recovery and supportive monetary and fiscal policy. The point here is that sometimes when investors think of risk-on they think about the Australian dollar and emerging markets.
The big takeaway from all this is that the picture remains positive for Australia and emerging market currencies, and most of them will resume their rise against the dollar this year.
Malaysia’s economy shrinks
In Asia, Malaysia’s economic recovery went into reverse in Q4, with GDP falling 0.3 per cent quarter-on-quarter. In year-on-year terms, the pace of contraction worsened from a revised -2.6 per cent in Q3 to -3.4 per cent in Q4.
Elsewhere, Bank Indonesia is likely to cut interest rates by a further 25 basis points at its meeting on Thursday. Hit hard by the COVID-19 pandemic, the likely move by the central bank comes after Indonesia’s economy last year notched its first full-year GDP contraction since 1998.
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