Market Update and Economic commentary

Risk assets including equities and credit continued to power ahead in April.  Locally, the share market and the Australian dollar were supported by rising commodity prices.

Investors continued to monitor Covid cases and the pace of vaccine rollouts worldwide.

Thankfully there remain very few infections in Australia, although rising numbers elsewhere has provided a reminder that the pandemic is far from over.


The latest inflation data were well below consensus forecasts.  Price falls for fruit and domestic travel, along with increased government subsidy payments for new dwellings and electricity, resulted in headline CPI coming in at just 0.6% for the March quarter, versus expectations of a 0.9% increase.  The annual rate rose to 1.1%, well below the 2% to 3% target range.

The Reserve Bank of Australia still expects wage and price pressures to remain subdued "for some years", which suggests policymakers could be hesitant to unwind the accommodative monetary policies that are in place.

More than 70,000 new jobs were created in March - twice as many as forecast - which saw the unemployment rate drop to 5.6%.  Interestingly, Australia is the only G20 country where current employment is above pre-Covid levels.

New Zealand

At 1.5% year-on-year, inflation in New Zealand was little changed in the March quarter.  Official interest rates were left unchanged, at 0.25%.  Arguably the most significant development over the month was the removal of travel restrictions between New Zealand and Australia.  This has created a quarantine-free Trans-Tasman travel 'bubble', which is expected to have a beneficial impact on the New Zealand economy, in particular.


The economic recovery in the US appears to be continuing apace, supported by massive government spending.  Commentators indicated the Biden Administration could raise capital gains tax rates to help finance additional spending.  Initial reports suggest capital gains tax could almost double for high income earners.

US inflation has picked up.  Consumer prices were up 0.6% in March and 2.6% on a rolling 12-month view.  There remains concern that the high level of government spending could see inflation rise further, although policymakers insist the central bank has the tools to curb any inflation pressures.

900,000 jobs were created in March.  This was comfortable ahead of expectations and saw the unemployment rate drop to 6.0%, from 6.2% previously.  Whilst encouraging, employment numbers remain 8.4 million below pre-pandemic levels.

The easing of Covid restrictions has undoubtedly released pent-up demand and supported consumer spending.  Retail sales rose by 9.8% month-on-month in March, supporting sentiment among retailers.


Despite persistently high unemployment and reports of vaccine shortages in the region, consumer confidence in the Eurozone has risen back towards pre-Covid levels.  Indicators from over the English Channel may be providing some encouragement.

More social distancing restrictions in the UK were lifted during April, and so far there have been no indications of any associated increase in Covid cases.  This suggests restrictions will continue to be relaxed as planned through May and June.  The UK is well ahead of other European countries with its rollout program, with at least one vaccine already provided to more than half the population.


The post-Covid recovery in China appeared to lose momentum in the March quarter.  The world's second largest economy grew by just 0.6% during the period; much less than expected. 

Exports remain strong, but small private companies are not yet enjoying the same level of growth.

There was an alarming spike of new Covid infections in India.

In general, services sectors are performing less well than manufacturers, partly owing to fresh virus outbreaks early in the year and 'celebrate in place' directives for February's Lunar New Year holiday.

Australian Dollar

The Australian dollar was little changed in the first half of April, but started to strengthen in mid-month thanks to rising commodity prices.  Iron ore prices climbed to new record highs, for example, and copper and LNG prices also increased.  In the month as a whole, the 'Aussie' appreciated by 1.4% against the US dollar - to 77.2 US cents - and by 0.8% against a trade weighted basket of international currencies.

Australian Equities 

Rising earnings expectations saw the S&P/ASX 100 Accumulation Index rally 3.5% in April, as the effects of large monetary and fiscal stimulus programs continue to trickle through the economy.  Improving economic data, rising commodity prices and a small decline in bond yields provided additional support.

Lower bond yields provided relief across the board for the Information Technology sector (+9.7%).  The Materials sector also performed strongly, rallying 6.8% as the price of gold and iron ore moved higher.  Demand for iron ore has surged given the size of infrastructure-focused fiscal stimulus programs in Australia and elsewhere.

Small cap companies outperformed across the majority of sectors, enabling the S&P/ASX Small Ordinaries Index to close the month 5.0% higher.

Listed Property

Global property securities posted solid gains in April.  The FTSE EPRA/NAREIT Developed Index rose 5.0% in Australian dollar terms, outperforming wider equity markets.

The best performing regions included the US (+8.2%), France (+7.0%) and the UK (+6.1%).  Laggards included Japan (-0.4%), Singapore (+1.4%) and Hong Kong (+2.1%).

Real estate markets continue to be supported by stimulatory fiscal policy, which will most likely persist through 2021.  Combined with positive sentiment on the back of major markets reopening from Covid, these policy measures have seen demand in the sector increase.  Locally, the A-REIT market increased 2.9%.

Global Equities

Most global share markets made solid progress, enabling the MSCI World Index to close the month 4.0% higher in local currency terms.

US equities led the way, with the S&P 500 Index and the technology-heavy NASDAQ both rising more than 5%.  Both hit fresh all time highs during the months.

Technology firms have performed particularly well during the pandemic, fuelled by stay-at-home guidelines and evolving consumer habits.

In Europe, most major bourses closed April between 1% and 4% higher.  Italy was a notable laggard, returning -2.0%.

In Asia, major stock markets in Chine, Hong Kong and Singapore added between 1% and 2%, although the Japanese Nikkei 225 Index declined by 1.3%.

Emerging markets also registered solid gains, despite the spike in Covid infections in countries like India.  The MSCI Emerging Markets Index added 2.4% in local currency terms, extending gains made over the past year to nearly 50%.

Global and Australian Fixed Income 

Returns from global bond markets were mixed, with yields moving in opposite directions in the US and Europe.

In the US, 10-year Treasury yields paused for breath, moving 11 bps lower after having increased 83 bps in the March quarter.  Conversely, 10-year Bund yields continued to increase, closing the month 9 bps higher, at -0.20%.

Yields on UK gilts and Japanese Government Bonds were unchanged over the month.

In Australia, 10-year Commonwealth Government Bond yields fell 4 bps, to 1.75%.  This move helped the domestic fixed income market register steady positive returns over the month.

Global Credit

Sentiment towards global credit markets was supported by generally encouraging economic data, and pleasing corporate earnings releases for the March quarter.

Spreads narrowed in both the investment grade and high yield sub-sectors, resulting in positive returns from credit markets.

Spreads on some speculative grade bonds are now back to levels last seen prior to the GFC in 2008.  This is not necessarily a negative indicator, but is something for credit investors to monitor in case of a sudden reversal in sentiment.

Your Investment Options and Strategy

Building your wealth for the long term starts with a sound investment strategy.

But with so many options outside your superannuation fund - from bonds to managed funds - where might you begin? 

Almost every type of investment come with risk

Investments can help grow your money.  However, there's not only a risk associated with the various investment types, there's also a risk you could lose money, as well as the possibility that your investments won't achieve your financial goals within the timeframe you set out.  Generally speaking, the higher the risk, the greater the potential return over the long term.

Understand your risk profile and timeframe

With this in mind, it can help to first understand what type of investor you are - and recognise that this may change as your life changes or as you get closer to retirement.  To work out your risk profile, think about how you feel about short-term fluctuations in the value of your investments.  Would they keep you awake at night, or would you be comfortable riding them out?

When time is on your side, you may decide you can afford to take some calculated risks with your investment portfolio.  That might place you at the 'moderate', 'growth' or even 'high growth' end of the risk spectrum.  But if you're planning to retire or scale back on paid work soon, you may adopt a more 'defensive' or 'conservative' investment approach to protect the value of the capital you've built up.  A market correction close to retirement could have a disproportionate impact on a portfolio - so it's worth considering two risk profiles: one for superannuation and one for other investments.

What are asset classes?


Cash is considered one of the safest investments.  But in exchange for its safety, it also generally offers the lowest potential return.  Investing in a cash option can provide stable, low-risk incomes - usually through interest payments.

Fixed Interest

Investments in government or corporate bonds, mortgages or hybrid securities are a loan by you (the investor) to the issuer.  In return, the issuer pays you a regular interest payment over a fixed term.  Depending on the kind of investment, they can also repay the capital you initially loaned them at the end of the term.

Property and Infrastructure securities

You can invest in property and infrastructure via the share market - including commercial, retail and industrial property, or transport, utilities and telecommunications infrastructure.  Investing in property and infrastructure securities can help you access these investments without needing the often large sums of capital required for owning them directly.

The potential returns for these investments can be medium to high, but you may need to hold them for a few years.

Australian and International shares

Shares (also known as equities) give you part-ownership of an Australian or international company.  Your potential returns include capital growth (or loss) and income through dividends.  Shares are considered medium to high-growth assets whose values tend to trend higher over time.

However, they generally carry a higher level of risk than other asset classes, meaning you may need to hold them for longer than other assets to ride out market fluctuations and generate higher returns.

All about diversification

All investments perform differently when financial markets change.  Diversification is when you spread your investments across a range of assets to help reduce risk in your portfolio - that is, to avoid putting all your eggs in one basket.

Diversification won't fully protect you against loss, but it can help reduce your risk of capital loss if there is a market down-turn - balancing out your returns if some investments underperform others in a given environment.


Good News: Super Contribution Caps to Rise

It could be time to revisit how much you are contributing to super and make a super plan for the future.  On July 1 2021, both the concessional and non-concessional superannuation contribution limits, also know as 'super contribution caps', will rise.

This is good news because this is the first time these limits have changed since 1 July 2017, when the concessional contributions cap was reduced to $25,000 pa for the 2017/2018 financial year and onwards.

Since that time, the non-concessional contribution cap hasn't changed either, currently $100,000 pa.

What are Concessional contributions?

These are super contributions made by your employer, from your pre-tax income (salary sacrifice contribution) or contributions for which you claim a tax deduction.  They are generally taxed at only 15 per cent instead of your marginal tax rate.

What are Non-concessional contributions?

These are super contributions made from your after-tax income.  Since you've already paid income tax on these contributions, they are tax-free going into your super.

Due to indexation of Australians' average weekly ordinary time earnings (AWOTE), the concessional cap will increase to $27,500 from 1 July 2021.

What are the current and new contribution caps?

Current concessional contributions cap - $25,000.
New concessional contribution cap - $27,500.

Current non-concessional contributions cap - $100,000.
New non-concessional contribution cap - $110,000.

What does this increase mean for you?

Any increase in the super contributions caps means you may increase how much you can contribute to super.  The tax benefits plus the compounding of returns can make a substantial difference to your final super benefit.

Additional concessional contributions to super can be made by 'salary sacrificing' through your employer or via 'personal deductible contributions'.  You should consider whether to make non-concessional contributions or maximise your concessional contributions.

Concessional contributions

Additional concessional contributions can reduce your taxable income and your end-of-year tax liability.

Concessional contributions are subject to just 15% tax on entry to your super fund compared to your upper marginal tax rate which could be as high as 37% or 45% (plus 2% Medicare levy) if you're in one of the highest tax brackets.

Note: an additional 15% tax may apply to concessional contributions if your income is over $250,000.

How to make concessional contributions

Additional concessional contributions to super can be made by 'salary sacrificing' through your employer or via 'personal deductible contributions'.  Both methods have the same tax benefit so the method you choose comes down to what suits you.

Salary sacrificing: Salary sacrificing comes out of your pre-tax salary and reduces your net taxable income meaning you may pay less tax on your personal income.

Personal deductible contributions: Personal deductible contributions are paid by you, and you can then claim a tax deduction when completing your tax return.  If you choose this method, you need to submit a form to your super fund by a certain time advising your 'intent to claim a deduction' on your super contribution.

Making the most of 'catch up' contributions

'Catch up' contributions may allow you to use up to five previous financial years' unused contribution caps in the current financial year if you meet certain requirements.  The 2018/2019 financial year was the first financial year you could accumulate unused concessional contributions.  Unused carried forward concessional cap amounts expire after five years.

Non-concessional contributions

Non-concessional contributions do not entitle you to a tax deduction, but you won't pay any additional tax as you've already paid tax via your personal income tax liability.  Earnings on the contributions are taxed at only 15% and are tax-free once you access them as either a lump sum or a pension after age 60, when you satisfy a condition of release such as retirement.

Making non-concessional contributions to super might benefit you if you are seeking to contribute larger lump sum contributions.

Making the most of the 'bring forward rule'

If you were age 64 or less at 1 July 2020 you may be eligible to use the 'bring forward rule', ie bring forward and use up to two future years' worth of your non-concessional contribution caps.

Depending on your total superannuation balance this may allow you to contribute up to $300,000 (3 x $100,000) into super this financial year.  However, if you wait and the cap increases from $100,000 to $110,000, the bring forward amount will increase to $330,000 next financial year.  You generally need to meet a 'work test' if you are 67 to 74 years old at the time of the contribution.

Legislation is pending to increase the age at which you can trigger the bring forward rule from age 64 or younger as at 1 July of the relevant financial year to age 66 or younger.

With increases in the contributions caps on the horizon, 2021 may be a good year to revisit how much you are contributing to super and make a super plan for the future.


Learning the Lessons of 2020: An Extraordinary Year

When the COVID-19 pandemic hit Australia in March 2020 it brought immediate and severe financial gloom .

Shares plunged 37% and the economy slumped to its first recession in nearly 30 years.  However against that backdrop, 2020 turned out far better for diversified investors than initially feared.

The development of vaccines became the good news of the second half of 2020 and offered hope of a return to life as normal.  The anticipation of economic recovery, paired with ultra-low interest rates, drove a rebound in many investment markets and we did see a strong growth rebound in the second half of the year.  In 2021, we expect to see solid returns as markets shift from pandemic winners to cyclical investments, but the gains will likely be slower than seen coming out of the March pandemic lows of 2021.

For Investors, 2020 was better than feared

The list of negatives brought about by the COVID-19 pandemic cannot be ignored.  Unemployment surged, with severe disruption to industries like airlines, retail and the office sector.  Globalisation took a further blow and tensions rose with China.  Public debt skyrocketed.

However there were a number of key positives.  The massive fiscal support provided by governments shielded businesses from collapse and saved jobs and incomes.  Debt forbearance schemes headed off defaults, while plunging interest rates helped borrowers service loans.

Economies began to reopen after social distancing helped contain the virus, with nations like Australia, New Zealand and Asian nations doing better on this front than the US and Europe.

The November 2020 election of US President Joe Biden offered the prospect of less global policy uncertainty and reduced international tensions in 2021 and beyond.

Disruption caused by the pandemic massively accelerated a number of broader productivity gains.  These include the faster take up of technology like virtual meetings, e-commerce and use of the cloud to cut costs and boost output for business.

As a result, the pandemic has shown it is possible for people to work from home and enjoy a more balanced lifestyle - increasingly in regional areas where property prices are generally more affordable.

The benefits of science - typified by the rapid development of vaccines - has also served as a rebuke to populist politicians and offers hope for a better management of issues like climate change in the future.

The Lessons of 2020

- Timing market moves is hard - getting out at the top of the share market in February 2020 was hard, but getting onboard again for the rally in March last year was even harder.

- Don't fight the central banks - while they could not prevent the magnitude of the fall in share markets, their massive money easing was a key driver of the recovery.

- Investment valuations need to be assessed relative to interest rates - low rates makes shares relatively attractive.

- Depressions can be avoided - 2020 showed that a large rapid, well-targeted economic policy response can protect an economy from a significant shock and enable it to rebound quickly.

- Turn down the noise - stick to a long-term investment strategy.

Reasons for Optimism through the remainder of 2021

Recent bumps in the road of vaccine roll out has not stifled the overall goal of achieving herd immunity in many developed countries by the second half of this year.  Fiscal stimulus and easy monetary policy continue to work through the system, with even more fiscal stimulus being injected into the US economy.  Continuing high saving rates indicate significant spending potential as confidence improved.  Low inflation, and hence low interest rates, mean we are still in the "sweet spot" of the investment cycle.

After having run up so hard since early November 2020, shares are still vulnerable to a short-term pull back.  We are likely to see a continuing shift away from investments that benefitted from the pandemic and lockdowns (technology, health care stocks and bonds) to investments that benefit from recovery (resources, industrials, tourism stocks and financials).

We expect global shares to return around 8% this year, but we anticipate there may be a rotation away from tech-heavy US shares to more cyclical markets in Europe, Japan and emerging countries.  Australian shares are likely to be relative out-performers returning around 12%.

Australian home prices are likely to rise 10-15%, boosted by record low mortgage rates and government incentives, but the pause in immigration and weak rental markets will likely weigh on inner city areas, and units in Melbourne and Sydney.

Nine Things For Investors to Remember

- Harness the power of compound interest - under the principles of the 'Rule of 72', it takes 144 years to double an asset's value if it returns 0.5% p.a, but only 14 years if the asset returns 5% p.a.
- Don't get thrown off by the cycle - investors can often abandon a well thought out strategy at the wrong time during falling markets - as some may have done in March last year.
- Invest for the long term - get a plan that suits your wealth, age and risk tolerance and stick to it.
- Diversify - don't put all your eggs in one basket.
- Turn down the noise.  As discussed earlier.
- Buy low, sell high - the cheaper you buy an asset, the higher its prospective return, and vice versa.
- Beware the crowd at extremes.  Don't get sucked into the euphoria or 'doom and gloom' around an asset.
- Focus on investments that you understand.  It's probably best to avoid companies that have complex and hard to understand valuations or business models.
- Accept it's a low nominal return world.  Historically, when inflation is around 1.5%, the average return of 7% for super funds begins to look pretty good.