Investment update - 2020-21 financial year
ESSSuper - 16 Aug 2021
Daniel Selioutine, Head of Investments, provides economic and market commentary on the 2020-21 financial year.
Summary
The 2020-21 financial year will undoubtedly be remembered as an extraordinary year which marked the beginning of the end of the economic recession following the coronavirus pandemic. The period began shrouded in uncertainty, as COVID-19 infections reached new highs and countries raced to improve treatments and develop viable vaccines. The period ended with growing optimism after several vaccines were devised and proven to be effective, enabling many developed market economies to rapidly recover in the second half of the financial year.
As of 30 June 2021, approximately 3.4 billion vaccine doses have been administered across 180 countries – the equivalent of vaccinating over 22% of the world's population. North America and Europe have lead the world, with more than 50% of residents receiving vaccinations. Despite sporadic outbreaks of the virus and the emergence of a more infectious delta variant of COVID-19, financial market sentiment remains optimistic, with vaccination programs helping to suppress the number of severe cases which has enabled governments to safely re-open their economies to the world.
Market performance
Global financial markets rallied significantly in the 2020-21 financial year, with many major equity market indices ending the financial year at all-time highs despite showing signs of fragility earlier in the year. Equity markets wavered early in the financial year, coinciding with rapidly rising COVID-19 cases in the US in the lead up to the US presidential elections. Financial market sentiment became increasingly positive as certainty about the effectiveness of new vaccines increased and governments and central banks continued to stimulate their economies.
The S&P 500 delivered an outsized 40.8% (USD) return over the year to June 2021. Gains in stock prices were more broad based than last year's "lockdown beneficiaries", and included companies in cyclical sectors such as Energy and Industrials. Share markets in Europe experienced more modest gains, with the UK's FTSE 100 delivering 18.0% (GBP) and the STOXX Europe 600 Index closing the financial year 29.1% (EUR) higher.
The Australian share market (ASX 300) ended the year 28.5% higher, registering its strongest financial year in more than 30 years. Companies in the financials, information technology and consumer discretionary sectors were some of the strongest returning investments, generating returns which averaged above 35% over the financial year.
Investments in diversified Property and Infrastructure portfolios delivered smaller but still positive returns, despite the 'start-stop' nature of pandemic lockdowns adversely impacting these investments. Property investments such as retail shopping centres as well as many GDP-linked infrastructure investments began to show tentative signs of recovery as the threat of future lockdowns eased.
Cash and Fixed Interest investments generated low returns over the financial year, driven by very low interest rates maintained by policy makers to help stimulate the economy in the aftermath of COVID-19. The Barclays Global Aggregate Index (Hedged to AUD) generated -0.2% over the financial year. Rising inflation expectations in the latter half of the year also weighed on many Fixed Interest assets, whose returns decline if central banks increase interest rates in an effort to combat rising inflation.
Economic overview
Global economic conditions have drastically improved over the year, buoyed by expansionary policy from governments and central banks and pent-up demand from consumers who have deferred expenditure during lockdowns. Soaring house prices in the US, Europe, Australia, and New Zealand are in part a reflection of strong consumer confidence, low interest rates and in some cases higher household savings. The global Purchasing Managers' Index (a common indicator of production, jobs and economic activity) is indicating that the world's economy has entered into an expansionary phase.
The US headline inflation rate has increased consistently since January 2021, rising from 1.4% to 5.4% year-on-year in June 2021. The rate of increase is being described as 'transitory' by US Federal Reserve Chair, Jerome Powell, who has made assurances to markets that interest rates are unlikely to rise until late 2022. The European Central Bank (ECB) changed its inflation target to 2% (previously defined as 'close to, but below 2%'), leaving additional room for the ECB to keep interest rates lower for longer.
In Australia, the Reserve Bank of Australia (RBA) has acknowledged a stronger than expected recovery while electing to keep the cash rate unchanged in June 2021. The current cash rate is 0.1% and is the lowest cash rate in Australia's history.
Looking ahead, investors in many developed nations have turned their attention to monitoring their economies for signs of overheating, which may prompt authorities to taper some of their stimulus measures and potentially increase interest rates.