Markets rally, but headwinds remain


Perpetual Private Insights

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A resurgent economy and increasing optimism from investors produced another strong result for equity markets in the March quarter. Upgraded forecasts from the International Monetary Fund (IMF) for Australian GDP growth has added to the positivity that looks set to continue through 2021.

The expectation of rising inflation, however, has produced negative capital returns for Fixed Income, and downgrades to the predicted recovery of developing nations suggests it won’t all be plain sailing for investors.

In Perpetual Private’s quarterly investment report for January to March 2021 we look at the returns for Australian and global markets, and the issues likely to affect the performance of a broadly diversified portfolio in 2021.

One-year anniversary of COVID-19

23 March 2021 marked one year on from the market bottom as the COVID-19 induced economic slowdown saw the ASX/200 drop around 35% in the sharpest sell-off in history – effectively erasing the gains of the previous five years in equity markets to approx 1.4% p.a.

Swift government and central bank action saw the market rally off these lows – a rally that continues to this day. In fact, by the end of the March quarter 2021, the five-year returns for the Australian stock market were back to 10.3% p.a. - a timely reminder of a key principle of successful investing; stay invested for your time horizon and don’t react to short term market events.

Not all equities are equal

While returns were lower than the last quarter of 2020, the global vaccine rollout and the continuation of the economic recovery produced another strong quarter for equity market investors. The S&P/ASX 300 Accumulation index rose 4.2% for the quarter (and over 38% for the last 12 months). The rise of the benchmark was off the back of many companies reporting better-than-expected results during the half-year reporting season in February.

As economies reopen, investors have been rotating their equity exposure out of growth stocks (such as Tech) to sectors that especially suffered as a result of the lockdowns – Financials, Energy and Industrials.

Financial stocks rose an impressive 12.1% and Communication Services added 9% for the three months to 31 March. On the other hand, Tech stocks slumped 10.3% and Healthcare eased 2.3% over the same period.

A global view

By the end of the quarter, more than 620 million COVID–19 vaccinations had been administered worldwide. The sheer speed of the vaccine development and rollout has been a scientific miracle and paved the way for an economic rebound few economists predicted a year ago. In the US, the Dow Jones and S&P 500 both closed the March quarter at record highs.

The IMF has predicted US GDP to grow nearly 6.4% in 2021, easily outpacing forecasts for the Euro area at 4.4%, the UK at 5.3% and Japan at 3.3%.

Unfortunately, the IMF outlook for developing economies isn’t so rosy. They continue to downgrade the outlook for developing economies, creating cause for concern for markets where there is less access to vaccines.

Inflation ahead?

Over the quarter, strength in equities was underpinned by enormous government and central bank support, particularly in the US. The new Biden administration passed a fresh round of stimulus cheques and are currently working a A$2.5tn infrastructure package through Congress.

This has caused many investors to begin to look through COVID-19 to consider a possible longer-term effect of this unprecedented fiscal support – an overheating economy. With global supply chains already disrupted due to COVID-19 – and boats getting stuck in the Suez Canal – more money available to buy fewer goods may drive inflation higher.  

This concern in markets about inflation saw an uptick in bond yields. Bond yields rise as fixed bond payments (coupons) in the future will be able to buy less, making them less desirable. When they’re sold, the decline in price which sends yields higher.  

The US government 10-year bond started the year at 0.90% and is now around 1.70%. The Australian 10-year bond also rose significantly in February and March 2021, from 1.92% in January to finish the quarter with a yield of 1.83%.

Offsetting the strength in equities, the Bloomberg AusBond Composite Index lost 3.2% during the March 2021 quarter.

RBA holds rates at 0.10%

The RBA held official interest rates at 0.10% in an effort to stimulate the economy. While joblessness fell more than expected, there is still weakness in several areas, including tourism and education. Inflation remained below the RBA’s target range of 2-3%, something our central bank doesn’t expect to consistently reach for several years. 

Sustained low interest rates should see house prices continue to bubble away, while for retirees and those nearing retirement, investment income will remain under pressure. This may make it necessary to consider more risk than you’ve traditionally come to expect to meet your retirement income needs.

Value of advice

As we saw earlier, the rollercoaster ride that has been the equity markets over the last 12 months has highlighted the importance of staying invested and keeping the faith that markets will rebound. Good advice will help you separate emotions from your investing and stay focused on your long-term goals.

COVID-19 has shown us that thinking about risk is a vital component of long-term investment success. Sequencing risk, in particular, posed a challenge for retirees in 2020 – that is, a major market downturn at or around retirement can be especially harmful to retirement prospects, as drawing on funds during a market decline leaves less invested to benefit from a recovery.

While the share market rally has resumed, another market downturn in the future is inevitable and it’s important to be prepared. An appropriately diversified portfolio will help mitigate sequencing risk and is an area where good financial advice can improve your long-term retirement outcome.     

The road ahead

In Australia, the vaccine rollout has been bumpy and is behind schedule. However, this may not be a problem as, overall, we have managed COVID-19 well. Nonetheless the longer a rollout takes the more risk there are of variants and outbreaks that may derail our economic recovery. The end of JobKeeper in late March also means we are entering unchartered territory as businesses face further pressure to survive.   

For domestic and international equity markets, we remain upbeat particularly for cyclical stocks which will benefit from reopening economies, access to vaccines and central bank support. We remain cautious around the risks of volatility, particularly if inflation forces an interest rate rise earlier than expected. Stocks which surged in 2020 may also present a valuation risk.    

Our view is less positive for the returns for defensive assets and fixed income. Generating returns is an issue, and it will become more of an issue if inflation picks up. This doesn’t mean getting out of those sectors as they still provide protection by diversification. But you may need to take more risk in these sectors than you would have over the last 10 years.


If you’re an investor who wants to review the risk in your portfolio, our experienced financial advisers and investment specialists would love to help you. Contact your Perpetual adviser or call us on 1800 631 381 if you’re looking for an expert view on where to invest in 2021 and beyond.

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Perpetual Private advice and services are provided by Perpetual Trustee Company Limited (PTCo) ABN 42 000 001 007, AFSL 236643. This information was prepared by PTCo and Perpetual Investment Management Limited (PIML) ABN 1800 866 535, AFSL 234426 and is used by PTCo. It contains general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable for your circumstances. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The information is believed to be accurate at the time of compilation and is provided in good faith. PTCo do not warrant the accuracy or completeness of any information contributed by a third party. Any views expressed in this article are opinions of the author at the time of writing and do not constitute a recommendation to act. This information, including any assumptions and conclusions is not intended to be a comprehensive statement of relevant practise or law that is often complex and can change. No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital. Past performance is not indicative of future performance.