Despite prolonged lockdowns in NSW and Victoria, the Australian share market has continued to rise as earnings news has been strong with investors leading to the return of capital through dividends and buybacks, according to AMP Capital.
The firm’s head of investment strategy and chief economist, Shane Oliver, said it were the banks, telcos, utilities, and retail stocks that led the market higher.
“While shares are at risk of a short-term correction, we ultimately see the rising trend continuing,” he said.
“…last years’ experience showed that the economy will bounce back strongly helped by massive fiscal support; monetary policy may now be easier for longer; lower bond yields and the surge in earnings have made shares cheaper; some are expecting more merger and acquisition activity; and vaccines are providing optimism that we will see a more sustained recovery from later this year; and global shares have also been strong supported by some of the same things.”
Oliver estimated the lockdowns since late May were costing around $17 billion, and while it was unlikely the lockdowns would end this month, growth was likely to start recovering through the December quarter as ultimately cases would suppress and vaccination rates rose.
“We expect gross domestic product growth through next year to be well above 4%,” he said.
“Shares remain vulnerable to a short-term correction with possible triggers being the upswing in global coronavirus cases, the inflation scare and US taper talk, likely US tax hikes and a debt ceiling standoff and geopolitical risks.
“But looking through the short-term noise, the combination of improving global growth and earnings helped by more fiscal stimulus, vaccines allowing reopening once herd immunity is reached and still low interest rates augurs well for shares over the next 12 months.”
Oliver noted cash and bank deposits were likely to provide very poor returns, given the ultra-low cash rate of just 0.1%.
“We remain of the view that the RBA won’t start raising rates until 2023,” he said.
“Although the Australian dollar could pull back further in response to the latest coronavirus outbreaks and the threats posed to global and Australian growth, a rising trend is likely to remain over the next 12 months helped by strong commodity prices and a cyclical decline in the US dollar, probably taking the Australian dollar up to around US$0.85 over the next 12 months.”