What’s happening in markets – May 2021

Turning our attention back to the start of last year, during the first quarter of 2020, share markets experienced some of their largest one-day falls on record. Fast-forward to today and the New Zealand share market has more than recovered its losses – up nearly 5% from its pre-COVID peak in January 2020. Global share markets meanwhile have fared even better, led by the major US share markets, which are up over 20 percent since their pre-COVID peaks in February of last year.

The global economic recovery is gaining momentum

The global economic recovery is gaining momentum and the world economy is set to recover at a significant pace over the rest of 2021. This is being driven by continued monetary and fiscal stimulus (low interest rates and a hefty dose of government spending), the vaccine roll-out (in developed countries at least), and the gradual re-opening of some of the major economies following months of lockdown.

The recovery is also being aided by pent up consumer demand and excess household savings, built-up over the past year. The International Monetary Fund (IMF) estimates the world economy to expand by 6% in 2021, with the US and China leading the way. According to its forecasts, the US economy is expected to grow by 6.5% in 2021 – its fastest rate of growth since 1984, while China is expected to grow at 8.4%.

The roll-out of vaccines since the start of this year is expected to facilitate the wider  economic reopening in many countries. For instance, at the time of writing the US has administered at least one dose of vaccine to 42% of its population, while in the UK it is over 50%.

The US economy is showing other signs of its rebound, having added more than a million jobs during the first quarter of this year, and with the unemployment rate dropping from 6.3% to 6%. The UK economy, which is gradually reopening after several months of stringent lockdown restrictions, is also seeing a rapid pick-up in activity. In contrast, some countries in the European Union are facing delays in their vaccine rollout and so are likely to lag the recovery in other developed countries.

How have global financial markets fared over this time?

Financial markets have rallied higher since late last year following the declaration of Joe Biden as the victor of the 2020 US presidential election. Since taking office in January 2021, the new Biden-led administration kicked off the year by introducing a $1.9 trillion COVID-19 relief bill that included a one-off stimulus payment of US$1,400 to many Americans.

Also, through its ‘Build Back Better Plan’, the Biden administration has proposed a multi-trillion-dollar economic and infrastructure package which, if put into law, will include investments in infrastructure – and this in itself is expected to generate millions of jobs. The other notable milestone for his administration has been the mass vaccination drive. President Biden pledged to have administered 100 million vaccine shots by his 100^th day in office, and it reached this goal by mid-March, nearly 40 days ahead of schedule.

US share markets have reacted favorably to these initiatives, and are now sitting close to new record highs. A strong earnings season in the US, led by index heavyweights such as Apple Inc and Amazon, has also been a significant contributing factor for the stellar run in US share markets. The US corporate sector has been resilient despite falls in economic activity, but company earnings have generally been well ahead of expectations (and by a huge margin in some instances).

On the flip side, there are concerns that the fiscal initiatives coupled with an earlier-than-expected rebound in growth and pent-up demand, may add to inflationary pressures in the global economy. This had resulted in some ongoing volatility in financial markets, while worries that interest rates may need to rise in order to tame any signs of more rampant inflation has led to weaker returns from the more interest-rate sensitive bond markets. This is covered in greater detail in our piece on inflation, which can be found here.

New Zealand’s economy is doing pretty well

Closer to home, the outlook for the New Zealand economy also remains generally positive. While there are signs that the economic recovery has slowed in recent months, some parts of the economy are doing very well, notably construction and manufacturing. Also, the housing market has been surprisingly strong over the past 12 months, According to Core Logic NZ, the house price index is up 16% on average over the last year.

The services sector, however, continues to struggle as our borders remain closed. The absence of international tourists has weighed on economic activity over summer. A weaker-than-expected fourth quarter Gross Domestic Product (GDP) number reflected this. That said, the recently announced Trans-Tasman travel bubble should be positive for this sector.

According to Tourism New Zealand, prior to COVID-19, visitors from Australia constituted nearly 40% of the total visitors to New Zealand, and contributed nearly $2.7b to the sector in 2019. While the potential visitors from this bubble may fall short of ‘normal’ levels, they should make a material difference to the services sector going forward.

The Government recently announced several policy measures to curb the overheated housing market. The changes to the residential property ‘bright line’ test (extended from 5 years to 10 years), and the removal of interest deductibility on investment properties are likely to have a considerable impact on the level of house price inflation over the medium term. Many market commentators believe the new policies are likely to support a ‘wait and see’ approach from the Reserve Bank of New Zealand (RBNZ) when it comes to its near-termmonetary policy settings.

Cautiously optimistic

Overall, investors appear to be quite optimistic about the global recovery. However, there are some risks, such as uneven global economic growth as the emerging markets lag other developed economies and the possibility of the vaccines being ineffective against some of the new coronavirus variants,

In this risk-on environment, the current economic backdrop should therefore be more supportive of share markets over bond markets, cyclical stocks over technology stocks and credit sectors over government bonds.

Any views expressed in this article are the personal views of Mugdha Kulkarni and do not necessarily represent the views of BNZ, or its related entities.

This article is solely for information purposes and is not intended to be financial advice. If you need help, please contact BNZ or your financial adviser. While BNZ has made every effort to ensure that the information provided is accurate, neither BNZ nor any person involved in this article accepts any liability for any loss or damage whatsoever which may directly or indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in this article.