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As I See It: March 2021

Greetings as we farewell summer!

A clearer pattern seems to be developing in the economy as the vaccines begin to be rolled out to the most vulnerable in our community and thankfully serious illness and death seems to have dissipated.  This is very different from other comparable nations who remain in lock down particularly in the European winter.  So on a relative bases, Australia has done better than its peers but the upheaval and trauma that many have experienced in our community should not be underestimated.  It does make Australia look a more attractive place to live and invest and this should play out in rising asset prices as we hopefully get back to normality soon.  There will be a period of time while the rest of the world tries to inoculate their communities where Australia has a head start to build an economic recovery while global interest rates remain very low.  This is quite a mixed blessing as generally, artificially low rates can create asset bubbles and Australia will not be able to lift interest rates until other countries can do the same without our Australian Dollar rising to an uncompetitive rate compared to the US.  As a guide, our elevated exchange rate has reduced the value of International shares when converted back to our local currency by around 10%.

Source: AFR 3/3/2021

The immediate effect of this is shown in Australian housing which according to Monday’s Australian Financial Review grew at 2.1% for the month of February nationally and is quickly regaining the historical highs reached in 2017.  With the RBA committed to keeping the 3 year bond rate close to 0.1% for the next three years there are great opportunities to borrow cheaply and consider fixing mortgage payments out to four years.  Our mortgage business has never been busier, so do feel free to contact us to take advantage of this opportunity by emailing haydn.dale@virtueandpartners.com.au The same is true in the Australian Equity markets where margin lending rates are also at historical lows.  Generally markets overshoot and achieve new highs before consolidating particularly in property which again is a mixed blessing for those trying to get into the market for the first time.  So the Saturday morning visit to local auctions continue to draw large crowds with a growing number of off market purchases .If you are interested in picking up a bargain contact fiona.goodland@virtueandpartners.com.au  who keeps a list of available properties not generally marketed to the public directly.

Source: CoreLogic

We have just concluded the Australian Interim reporting season which was the best in many years and showed clear signs of the economy recovering from the once in a generation recession of last year.  Naturally online retail did well, but for me the standout was the Resource Sector with new records for Iron Ore being achieved, reflecting in record profits and dividends for BHP, RIO and Fortescue.  The Banking Sector also improved with reserves for potential bad debts being wound back leading to profits and dividends returning to more predictable and sustainable results.  The Technology sector continues to grow quickly and now has its own index and some of the valuations do look courageous based on fundamentals.   However, in the event of a spate of mergers and acquisitions, financed with cheap borrowings there is plenty of potential for this sector to continue to outperform particularly where they have the capacity to compete globally .

With this optimism comes the obvious question of how long this will last and if a market correction is imminent.  “The canary in the coalmine” and a leading indicator is longer dated 10 year interest rates which Reserve Banks have less control over and as such we saw a significant spike last week leading to a drop in the equity market last Friday.  This has reversed itself over the weekend but is heavily tied to global interest rates which should rise to more normal rates as economies recover.  While the RBA continues to actively manage the 2 year rate by buying bonds most weeks to keep this close to 0.1% longer term rates are generally a function of wider supply and demand between institutional investors.  Movements and some speculation in longer term interest rates will probably wax and wane as economic data is released which may lead to greater volatility over the next 12 months.   Equity markets in the US remain close to all- time highs and a decline of 5-10% several times a year is quite common before markets recover to new highs if the collective quarterly earnings of the market justify it.  Interestingly, the greatest speculative market of all Bitcoin had fallen very substantially over the last few days and we continue to discourage clients from having anything to do with what is effectively a Ponzi Scheme.

The Royal Commission into Aged Care has just handed down its recommendations which is quite confronting and will lead to significant changes into how this important sector of the economy is regulated.  This is a fast growing part of the practice and is something that many clients are dealing with either directly or for their parents on a daily bases.   Around 1.3 Million Australians accessed Commonwealth programmes last year ranging from Home Support through to Respite and End of Life Care programmes, serviced by 3,000 various providers coordinated by the Federal Government through the My Aged Care website.  This is an absolute minefield to understand as accepted by the Commissioners.  We do have good relationships with Aged Care providers particularly on the Northern Beaches and access to specialist experts as needed to seamlessly deal with Centrelink get clients into the right facilities for their circumstances and help manage the financial side as needed.  Please feel free to speak to me directly if this a pressing issue and allow us to reduce the stress at what can be a very challenging time tony.virtue@virtueandpartners.com.au.

A summary of the findings are attached – Royal Commission into Aged Care and Safety (Volume 1).

So as you can see things are as busy as ever and while much work is now done on line or via ZOOM we really value the face to face connection and taking the time to really listen and understand what your hopes and wishes for the future are.  This is the only reason we exist as a business to serve our community as a trusted and reliable source of impartial financial advice at all stages of our lives.  Do keep sending your friends and family to us info@virtueandpartners.com.au.   For a more detailed and comprehensive explanation of my investment views  see www.virtueandpartners.com.au 

With my best wishes


Posted by Dr Tony Virtue, Principal


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