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Investing for an unusual recovery
11 Oct 2021
9 day(s) ago
The recovery from the coronavirus shock is not expected to be like previous more cyclical changes in the markets.
How are the big financial institutions being advised to position after the ‘pandemic.’ A glimpse at some of the advice is provided by Morgans, which claims a powerful economic restart after the COVID-19 shock is playing out. The broker says it is in favour of taking risks as the restart broadens, but thinks it is not a traditional business cycle recovery.
“Therefore the usual recovery playbook does not apply here. Instead, we see persistent near-term inflation from the rebound in demand as economies reopen.”
Morgans argues that the US dollar will weaken as the US Federal Reserve tapers off on its Quantitative Easing, and puts in place high budget (fiscal) deficits. “We expect the Australian dollar to trend back toward 80c by the first quarter of 2022. To mitigate short-term risks, we prefer hedged-away currency risk.
“US inflation should stay above target as the US labor market starts to tighten and the GDP output gap closes. We think the Fed will act to anchor US inflation expectations and lift interest rates but not until 2023.”
Morgan provides an overview of its take on different asset classes.
“Global equities. As the pace of lockdown restrictions eases in developed markets, we think the cyclical ‘rotation’ in global stock markets has further to run, given the upbeat prospects for the recovery coupled with significant pent- up demand. With governments unwilling to tolerate further lockdown restrictions and central banks prepared to let inflation run hot, we think the reflationary economic backdrop will continue to favour being invested in global equities. The key risk to the outlook is a significant slowdown in China, which is a scenario that has increased in probability over the last quarter.
Australian equities. Australian equities enjoyed 11 straight months of gains to September 2021, but as volatility returns and risks around Chinese growth resurface, we moderate our strong overweight position this quarter. Materials, Energy and Financials have benefitted from the bounce back in economic activity, but a potential tightening in lending standards for residential housing and a slowdown in China will limit the upside for the key sectors of the Australian economy. On the flipside, household balance sheets are in great shape, which should continue to support the recovery in consumption.
Fixed income We are underweight nominal government bonds as their ability to act as a portfolio defence is diminished with yields at current levels and rising debt levels may eventually pose risks to the low-rate regime. We prefer inflation-linked bonds as we see risks of higher inflation in the medium term.
Property We are neutral on the Australian property sector. While we continue to expect strong growth in housing and the industrial sub-sectors, we think macroprudential measures and the reopening of the economy will moderate the strong tailwinds powering the two sub-sectors. The uncertain environment for commercial real estate also weighs heavily on the asset class. Office buildings will likely suffer as companies allow work-from-home options, and the population moves away from large cities. Likewise, the pandemic sped up the adoption of e-commerce, raising questions regarding the amount of needed retail real estate space.
Cash With global short interest rates edging ever so higher and conditions in place for a return of pricing volatility, we see the need to build up some dry powder. Cash acts as a buffer against rising interest rates driving both stocks and bonds lower."
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