July 2021, the month that FMA Wealth was meant to be celebrating its 20^th anniversary of providing financial advisory and investment services. Well, we are celebrating this notable achievement, but just not with the fanfare, ticket-parade, or mayoral offering of the key to the city of Manly that we had hoped for! Only kidding! Of course, we are delighted to reach this milestone, and we thank our loyal and valued clients for their trust and support over these years, which we know have had the typical headwinds and tailwinds, joys and challenges for us all, as is life! Nevertheless, the journey continues and we progress looking forward! And the future looks bright.

One of these challenges is the ongoing situation of Covid-19 and, in particular, with the repeat of and duration of lockdowns. We all cringe with the continual berating politics, the blame game, the media citing propaganda of public fear. And, also, we are astonished and becoming more infuriated at the complacency of certain people to follow sensible health guidelines, and the selfish circumvention of public instructions and restrictions that are in place for the good of us all.

As for the Australian states and their medieval border hugging approach to this pandemic. You would not believe we are meant to be a Commonwealth! Someone alternatively described us now as the United Nations of Australia! Sad. As I have written before, the need to have a system of state governments in Australia went decades ago. It is damaging to the country and, really, quite an unnecessary overlay level of government as it operates.

The key task remains to get us vaccinated as we all well know. Fortunately, the rollout here is gaining momentum with both rising vaccination supply deployment and increased public participation in actually getting vaccinated. Let this momentum continue for health reasons, and for the reopening and progression of global economies. The economic revival momentum will, of course, see further sporadic virus outbreaks, but the solid revival should continue.

As noted in the latest Vanguard Investment Update; as vaccinations ramp up across the world, health risks are expected to gradually decline over the next few months, which could pave the way for a more robust recovery in face-to-face service sectors. However, differences in vaccination rates and varied levels of government policy support are likely to produce uneven economic results in the near term. The U.S., for instance, with its leading vaccination efforts and strong fiscal support, is likely to lead the global economic recovery with full-year growth of at least 7%.

Despite concerns about rising inflation, global equity markets capped off the financial year with yet another strong quarter to June 2021, as economic activity rebounded, corporate earnings strengthened, and government policy support remained accommodative to stimulating economies.

As I mentioned in our June newsletter, there has been a significant degree of economic momentum occur over the past twelve months. Abundance of cash injections and business stimulus have been critical to this happening in this uncertain times of covid. Vanguard added in their article that a strong U.S. economic recovery, coupled with ongoing supply constraints has, in their view, increased the likelihood of moderately higher inflation in the coming years. Sustained inflationary pressures will eventually call for the U.S.Federal Reserve (and other central banks), to taper stimulus and raise interest rates from near zero. In the U.S., we foresee conditions for an interest rate lift-off to be met in the second half of 2023. While Vanguard expects the labour market to return to normal by the second half of 2022, it expects that modest reflation, rather than runaway inflation, is more likely in the near term.

In Australia, the RBA has adopted a more conservative approach by committing to keep interest rates on hold until 2024 given weaker inflation pressures and a slower vaccination rollout. Personally, I think the RBA will have to move earlier. The latter increases the risks of sporadic outbreaks and lockdowns in the second half of this year, which could see consumers become more cautious with their spending. Despite a relatively faster economic recovery to date, Australian household consumption is still below its pre-Covid 19 level and weaker than that of other markets such as the U.S., where herd immunity is closer in sight.

The fund manager, Ausbil, reported in its latest market commentary that the strong performance across markets illustrates the power of the rebound we have experienced, even as the virus remains an overhanging risk. This resoundingly positive movement has been experienced across most markets and sectors. Ausbil notes in its economic outlook article that we are in a unique environment with massive fiscal and monetary stimulus underpinning growth, and the lowest interest rates in history. From an equity strategy perspective, the critical question is; when does this stop?

I think so when interest rates rise, as they will do, primarily as a result of inflationary forces increasing. We could then see a slowdown or even a reasonable market correction occurring. The dilemma or key question lingering in the background is, whether the major central banks will effect a soft landing as they scale back stimulus. As it has been described by the fund manager, MFS Global, central banks will be in the ‘Hotel California’ bind regarding Covid induced gigantic fiscal and monetary measures where they “can check out anytime, but they can never leave”!

Ausbil continues to say that, like most things in life, the answer is not simple, and as with most reactions in the market, it believes the eventual long-term rotation will not be as difficult or as volatile as the media and market pundits might think. Based on how markets work, it would be hard to expect the markets to achieve the same level of performance over the upcoming year as the year just gone, however, underpinning the markets will be another year where it expects strong growth. Ausbil does see a clear path to recovery even with some volatility and uncertainty along the way. It does also caution that, although it maintains a positive outlook on earnings, this is still a time to invest in only the best quality companies, which exhibit superior underlying earnings growth and strength to help achieve longer-term outperformance. What Ausbil is saying here makes good sense, and this economic expansion is positive. Although, this suggests inflationary sensitive rising input costs to occur too.

The supply constraint for many goods, services, and commodities, including building supplies, appears to be unable to accommodate the corporate and consumer demand for them. We all know that there is a wait for many of these things. And, behind this, there is even further pent-up demand that will exhibit itself more once we better emerge from the lockdown conditions and the supply disruption. There is certainly this feeling around that the wave of business momentum is building and has a way to go. We just need the world to be reach critical vaccination numbers. These are on their way!

Speaking of continued momentum, the upcoming August company reporting season will see the release of earnings for the six months to the end of June 2021. More interesting will be the associated company announcements of what are the expected earnings for at least the following six months. Market analysts’ expectations are that the forecasts will be strong. We will know this important analysis shortly.

On the business side here, FMA Wealth remains open as per usual, as we have done so throughout the whole Covid period since it began. Other than not being able to have face-to face client meetings because of obvious presently imposed restrictions, we are able to continue with Zoom and phone meetings for our clients.

Getting my second AZ vaccination jab this Friday, which will be good to have done. In saying that, I just can’t wait till I can get a haircut! I’m over the enforced man-bun and mullet hair combination! 😊.

Keep well, keep safe and keep sane during these lockdown (again) times!

As always, should you have any queries or need to talk in these more testing times of lockdown, please do not hesitate to contact us.