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November 2020

The global economy continues to be severely affected by 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 began to spread around the world earlier this year. However, there is now clearly light at the end of the tunnel. In the words of the Managing Director of the International Monetary Fund (IMF), Kristalina Georgieva, ‘the good news is the significant progress on vaccine development and while there are many caveats, this raises hopes of vanquishing the virus’ (19 November). In fact, on 9 November (only 6 days after the US presidential election), pharmaceutical company Pfizer announced that its final phase 3 vaccine trials had effectively been a success, with a submission for ‘emergency use authorisation’ expected before the end of November. This development is timely, given the ‘second wave’ of the virus that has hit many countries. As Georgieva also noted, ‘countries have started to climb back from the depths of the COVID-19 crisis but the resurgence in infections in many economies shows just how difficult and uncertain this ascent will be’.

According to the IMF, global growth is forecast to contract by 4.4% this year, before rebounding by 5.2% in 2021. This better outlook for next year varies significantly between regions, with the advanced economies as a group forecast to grow by around 4%, while the developing world is forecast to grow by 6%. Regional growth rates are forecast to be 5% for the Euro area, 6% for the UK, 3% for the US and 2% for Japan, while China and India are each forecast to grow by over 8%. Everywhere though the cost of dealing with this pandemic has been high and sovereign debt levels in most economies are 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 almost eliminated from the country. Both Commonwealth and State budget deficits have blown out by huge margins and national debt is forecast to grow dramatically (with net debt forecast to reach 36% of GDP by the end of the 2020-21 financial year). Ongoing monetary and fiscal support will be required for some time, with the Reserve Bank likely to keep interest rates historically low. Large fiscal support measures, including special unemployment relief programs, as well as grants and loans to businesses and individuals, could also be needed well into next year.

Most share markets followed last year’s ‘bull run’ with a heavy setback in March due to the spread of the coronavirus. Since then, however, share markets have been recovering so that from 1 January to 25 November, the broad US market (S&P500) was up 12%, the technology-focused US Nasdaq index was up an impressive 35%, Japan was up 11% and China 10%; while the German and Australian markets were unchanged and the UK and French markets were down by 15% and 7% respectively. Major share markets though could have further upside, assuming expansionary monetary and fiscal measures remain in place.

Major sovereign bond markets saw yields reach record lows in March. Yields then began to rise before central banks intervened to hold rates down in order to lift economic activity. The US 10-year Treasury bond yield fell to an historic low of 0.54% on 9 March and was still only 0.88% on 25 November. The Australian 10-year bond yield similarly was 0.57% on 8 March and 0.93% on 25 November. Most bond markets continue to look expensive.

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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