Dollars & Dirhams brought to you by Atlas Wealth Management
Welcome to our first edition of Dollars & Dirhams for 2021. As we start to settle in for the coming year there have been a number of themes emerging in various markets and economies that have been interesting to watch, especially the vaccine race that the UAE is currently having with Israel. Whether the best approach economically speaking is to conduct widespread vaccination programs amongst residents (like the UAE and Israel) or to maintain a closed border strategy (like Australian and NZ) will certainly be decided in the coming 12-18 months.
Equity Markets
Australian shares have started the year well, with the S&P/ASX 200 Index up 3.2%. The resources sector did especially well, up 6.1%, and for once financials, which had been a major drag on performance in 2020, helped the outcome with a 5.1% gain. Consumer discretionary shares were up 4.4%, and the runaway star of 2020, the IT sector, chipped in with a 3.5% gain.
Although the trading history is still limited to only a few weeks, the early data for 2021 show world share markets carrying on where they left off in 2020—with further price gains. The MSCI World Index of developed economy share markets is up 2.4% in U.S. dollars. So far this year the big American tech shares have continued to make the running—the Dow Jones U.S. Technology Index is up 4.0% and the Nasdaq is up 5.1%—but otherwise U.S. markets have not dominated overall returns as they did in 2020. Ex the U.S., the MSCI World is also up 2.4%. Japan has made a good early showing, with the Nikkei up 4.3% (in yen), and European shares have also contributed, with the FTSE Eurofirst 300 up 2.6% (in euros).
In the near term, the outlook is for continued recovery from the various COVID-19 episodes, and although one can never be sure about what COVID-19 might spring next, the latest news is encouraging. At time of writing, both Victoria and New South Wales were reporting no new local community cases, and it appeared likely that New South Wales would shortly begin rolling back its restrictions. Business surveys show the impact of the improvement: The most recent (November) National Australia Bank survey found that "both confidence and conditions are now above average, and stronger than the period right before the pandemic—albeit this partly reflects some 'snapback' following the containment of the virus."
There will clearly be a boost to near-term profitability, and it is likely that the large fall in corporate profits in the 2019-20 reporting year will be fully recovered in the current 2020-21 season. It helps that the miners should continue to benefit from a recovery in global growth and that the banks are emerging from their long gloom, assisted by an unexpectedly strong housing market. These are conditions where the share market could continue to perform reasonably well: CommSec's prediction for 2021, for example, was that the S&P/ASX 200 Index would end the year at 7,200, which would be a 9.3% gain for the year.
Property Market
With the Australian stimulus packages being withdrawn at the end of March we are still hesitant about Australian property. When we can see the sector stand on its own two feet (with respect to both consumers and service entities) during the current Covid-19 pandemic then we may change our view but for the time being it is cautionary advice to tread carefully.
To date 118,000 Australian mortgages are still deferred and in the latest ABS Chart pack numbers released by the Australian Bureau of Statistics mortgage default rates has continued to rapidly escalate, even after the Federal government threw a truckload of cash at the sector to prop it up and support it.
So far the Australian government has spent approximately AUD$700 billion in support packages but that can’t continue forever. The Australian property market makes up a significant sector in the Australian economy as well as it being a crucial asset class for most Australians when it comes to their wealth building strategies which is why the government wants to protect this sector at all costs.
The Morrison governments attempt to spend their way out of a fallout in the property sector might work. Or it might not, and all they may have achieved is just kicking the can further down the road when it comes to a correction in the sector.
Just remember when the tide goes out, you see who is swimming naked... and low tide may occur around April/May.
Currency Market
The Australian dollar edged higher through trade on Monday this week, extending back through 0.77 US cents as reflationary expectations gather pace. Commodities and equities both advanced Monday, dragging the AUD toward intraday highs at 0.7713, buoyed by expectations for sustained fiscal stimulus roll outs and wide spread immunisation programs.
Having shrugged aside Friday’s dour US non-farm payroll print market attention has again shifted back toward long-term risk positive plays.
For now, the tug of war between short-term headwinds and long run expectations for recovery seems to be shifting back toward risk assets as the market prices in greater inflation risk. There is a growing concern record low interest rates and higher savings levels could spark a boom in consumer spending when economies re-opens, rapidly swelling inflation expectations and forcing the Fed to raise interest early, while tackling increasing financial instability.
Brett Evans
Managing
Director – EMEA
Atlas Wealth
Management
About Atlas Wealth Management
Atlas Wealth Management is the only firm in the UAE that holds dual licenses with both the Australian Securities & Investments Commission (ASIC) and the Dubai Financial Services Authority (DFSA).
Our speciality is providing wealth management and tax financial advice to Australian expats. We are an Australian firm, with a Australian team located in the heart of the Dubai International Financial Centre (DIFC) and we work solely with Australian expats located in over 30 countries including the UAE.