01-06-2021
George Lucas, Raiz Group CEO
Domestically, we’ve seen the Australia sharemarket perform well this month due to the global rotation in equity markets into energy, financials and material stocks such as copper, iron ore and other industrial metal companies, and out of the tech companies. On Friday, the ASX 200 reached new record highs boosted in large part by miners, oil stocks and banks.
On the rotation trade, it’s not immediately obvious what is now driving it. Commodity prices are now roughly where they were at the end of last month so there has not been a boon for the energy and materials sectors, while US treasury yields are broadly unchanged since the end of April.
It also doesn’t appear that a much more positive US economic outlook is the driver given recent economic data out of the US has been rather mixed. So, in short, it looks like profit taking. There are more sellers than buyers currently in the tech stocks as investors switch into other sectors.
In my view, this rotation is likely to continue for at least 12 months as bond yields rise and we experience a strong recovery in the global economy. As this happens, the relative appeal of value stocks will rise at the expense of more growth-driven tech stocks, and we’ll see investors take profit on their gains in tech over the last few years and reallocate to other sections in the market.
Bank Indonesia keeps policy rates at record low
In Asia, the Bank Indonesia left its policy rate at 3.50 per cent, where it has been since February, and signalled that it was in no rush to adjust its monetary policy settings again this year. Interest rates are expected to remain low in Indonesia to support the recovery for some time yet.
Since COVID-19 hit the southeast Asian nation, BI has undertaken significant measures to support the economy, cutting interest rates by a total of 150 basis points, relaxing lending rules, and injecting more than $55 billion of liquidity into the nation’s financial system.
Elsewhere, there was also news that the US Federal Reserve may soon discuss having a meeting about the possibility of cutting back on quantitative easing. There was also the projection from the Reserve Bank of New Zealand that its cash rate will start to rise in the second half of 2022.
Talk of interest rate hikes will likely strike fear into nations like Australia and Indonesia that don’t want their currencies to appreciate. Understandably, there are no indications yet that these two nations are even thinking about considering such meetings.
China PMI expected to rise in May
Looking ahead, this week sees the release in China of the official manufacturing Purchasing Manager’s Index (PMI), which is tipped to hit 51.1 in May, according to poll of economists by news agency Reuters. A PMI score above 50 indicates an expansion in factory activity on a monthly basis.
It’s likely that the data will suggest that output rose in China further above its pre-virus trend last month thanks to the recent rebound in services and continued strength in industry and construction.
Demand in China is extremely strong right now, just ask beef farmers around the world as China is now registering record imports of beef. There have recently been strikes in Argentina so I assume the US and Canada will benefit from this increased demand.
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