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February 2021

The global economy now appears to be on the cusp of a rapid recovery from the worst of the negative effects of the economic restrictions put in place by governments around the world to hold back the spread of the Covid-19 coronavirus pandemic, which originated in China and spread around the world from early last year. After quickly sliding into recession in March 2020, the world economy soon began to recover before having to endure a ‘second wave’ of the virus late last year. In recent weeks, however, the number of cases of the virus worldwide has begun to recede significantly, partly due to the start of widespread vaccination programs and partly due to the apparent achievement of ‘herd immunity’ in some regions. According to the International Monetary Fund (IMF) in its latest report (January), the global economy contracted by 3.5% in 2020 but is forecast to expand by a strong 5.5% this year. Behind this forecast recovery is what the IMF terms ‘expectations of a vaccine-powered strengthening of activity later in the year’. The underlying assumption is for ‘broad vaccine availability in advanced economies in summer 2021 and across most countries by the second half of 2022’.

The IMF is projecting the US and Japan ‘to regain end-2019 activity levels in the second half of 2021, while in the euro area and the UK activity is expected to remain below end-2019 levels into 2022’. In the case of the US, the longer-term growth outlook is likely to depend on how pro-growth or otherwise the new Biden administration’s economic policies prove to be. On the other hand, China has been quick to recover from the pandemic, actually expanding last year by 2.3% and is forecast to grow by over 8% this year, while India is also forecast to bounce back very strongly, growing by over 11% this year. Everywhere though the cost of dealing with this pandemic has been high, with sovereign debt levels in many economies, notably the US, the UK, most of Europe and Japan, expected to reach levels unseen since the Second World War.

The Australian economy has also been heavily affected despite the fact that the virus has been all but eliminated from the country. A nationwide vaccination program has now begun, which is expected to see most of the adult population progressively vaccinated over coming months. However, an expensive ‘Jobkeeper’ employment support program has seen the Commonwealth’s budget deficit blow out by a huge margin, with national debt forecast to reach 36% of GDP by the end of the current financial year, while State Government debt has also ballooned. Generous monetary policy support measures being provided by the Reserve Bank, including historically low official interest rates and ‘quantitative easing’ are likely to remain in place for some time, although large-scale fiscal support measures, including grants and loans to businesses and individuals, are likely to be steadily wound down this year.

Most share markets reacted to the initial spread of the coronavirus early last year with a heavy setback in March but then quickly began to rebound once it became evident that enormous monetary support would be provided worldwide. Over the full year in 2020, most major markets rose, including the US, Japan, China, Germany and Australia. From 1 January this year, market movements to 24 February included rises of 5% for the broad US market (S&P500), 6% for the technology-focused Nasdaq, the UK market 3%, France 4%, Germany 2%, Japan 8%, China 3%, India 6% and Australia 3%. Markets could have further upside, assuming expansionary monetary and fiscal policies remain in place.

Major sovereign bond markets reacted to the initial spread of the coronavirus early last year with a heavy setback in March but then quickly began to rebound once it became evident that enormous monetary support would be provided worldwide. Over the full year in 2020, most major markets rose, including the US, Japan, China, Germany and Australia. From 1 January this year, market movements to 24 February included rises of 5% for the broad US market (S&P500), 6% for the technology-focused Nasdaq, the UK market 3%, France 4%, Germany 2%, Japan 8%, China 3%, India 6% and Australia 3%. Markets could have further upside, assuming expansionary monetary and fiscal policies remain in place.

Fiducian’s diversified funds are currently above benchmark for international and domestic shares, slightly above benchmark for listed property and well underweight fixed interest sectors, while cash weightings remain well above benchmark.

 

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