The developed equity markets performed strongly in the first two months of the quarter but fell in September. Factors contributing to the fall included global supply-chain disruption and concerns relating to Chinese property development market. Overall, the MySuper default Balanced growth investment option returned 1.66%* for the quarter.
The first half of 2021 was characterised by very strong global growth underpinned by the deployment of vaccinations as well as material fiscal stimulus, particularly in the US. The September quarter 2021 was less buoyant, with the Delta variant of the Covid-19 virus resulting in a less supportive investment environment. While Delta does not appear to be more deadly, it has a very rapid rate of transmission. Many countries in Asia (including Australia) found the emergence of Delta particularly challenging. This was because these countries generally had lower vaccination levels and previously unexposed populations.
Along with the Delta variant, another key aspect of the September quarter was increasing global supply chain bottlenecks. The bottlenecks reflect a range of factors. The main issue is that demand has been very strong at a time that many economies are still somewhat constrained by Covid restrictions. There has also been a substitution away from services towards goods demand (eg TVs and cars) because of Covid, which has helped underpinned large increases in commodity and shipping prices.
Another challenge is a shortage of US warehouse workers, truck drivers and retail workers. A record number of workers left their jobs in the US in August, despite some retailers already raising minimum hourly rates. There are similar issues in the UK, where Brexit has left the country with a lower supply of foreign workers.
A rapid revival of the global economy has also driven stronger energy demand. In combination with the approach of winter in the Northern Hemisphere and energy supply disruptions, the prices of natural gas, coal and oil have increased sharply. As a result, China is rationing power, which is exacerbating the supply chain disruption.
With signs of continued economic recovery and rising inflation pressure, some central banks signalled a slower pace of asset purchases and earlier interest rate rises. The US Federal Reserve recently announced that it may soon slow down the pace of its asset purchase program and hinted at the possibility of earlier rate hikes. The Reserve Bank of Australia expects the Australian economy to quickly bounce back from the lockdowns in NSW and Victoria and is continuing its bond-buying program but at a dialled-back pace.
Emerging market equities were a significant laggard this quarter, mainly due to a sell-off in Chinese equities. During 2021, significant changes in Chinese government regulation have had a large impact on some listed sectors (e.g. technology, ride sharing and education). These changes are part of a broader campaign aiming to ensure that some of the major Chinese private companies have a social focus that is closely aligned with the Government’s policy.
Another issue that emerged during the quarter was problems associated with China’s property development sector. Evergrande, China’s second-biggest developer, has been a focus for global markets recently, given its likelihood of default, size and high debt levels. The most likely outcome is that a systemic event does not occur, with a restructure of Evergrande’s debt and liabilities so that it can continue operate.
The global economy is expected to grow at an above average pace over the next 12 months, with progressively slower growth over coming quarters mainly reflecting the waning impact of fiscal stimulus (particularly in the US) and less of a boost from reducing Covid-19 restrictions.
The two key downside risks to our central case outlook are: that vaccine effectiveness falls materially as a result of new strains of the virus; and that inflation pressures are greater and more persistent than expected. The key upside risk is that supply-side issues dissipate quickly, resulting in lower inflation pressures and allowing central banks to raise interest rates more slowly.
*Past performance is not a reliable indicator of future performance