As expected, markets have continued their steady rise since the pandemic induced downturn bottomed out on March 23 last year. As can be seen in the chart below, the Australian market moved sideways during March as investors rotated out of the high growth tech stocks that had driven most of the strong returns into cyclical stocks, with strong earnings histories that should benefit from the economic rebound. However, in April, share prices have taken off again, and we’re now close to being back on par with the pre-pandemic record. Our thesis remains that low interest rates are conducive to long term asset price growth and the RBA has explicitly stated that interest rates won’t be rising until 2024, at the earliest.
S&P ASX 200 – 1 year price movement to 27 April 2021
There is some talk that the imminent prospect of inflation may force the RBA to rethink its position. In a recent newsletter we set out our view that a rise in core inflation is unlikely.
The pro-inflation pundits put forth the argument that supply chain shocks, rebounding consumer demand and falling unemployment are key indicators of incipient inflation. And they’re right….sort of!.
If those effects do cause inflation, it’s likely to be a short-lived inflation spike rather than a systemic and sustained increase. Supply chains will be re-configured, consumer demand will fall back to sustainable levels and the labour market will find some equilibrium.
In recent news, there was anecdotal evidence of employers claiming that they could no longer find workers to fill vacant roles and this is supported by the unemployment rate falling to 5.6% in March (down from its peak of 7.5% back in July). However, the underemployment rate remains high at 7.9%. So the fall in the unemployment rate is driven by part time and casual workers getting work….but not as much as they’d like. There is now mounting evidence that the effective full employment rate in Australia is now in the low 4 percents. So unemployment has to fall a lot further before there’s strong upward pressure on wages.
So how does this marry with some employers not being able to fill vacant positions? Its simply a case of market dislocation. The people who want more work aren’t in the same location as the available positions. Once people have confidence that that they can relocate without the difficulties of potential border closures, this market should clear.
A final word on house prices. Last year when other well known pundits were predicting falls in property values of up to 30%, we confidently predicted that falls would be 5% at most and this subsequently came to pass. Likewise earlier this year we predicted that house prices would rise by 5-10% this year. And you don’t need us to tell you that this forecast is being realised right now.
This confidence is based on a forecasting model that was originally developed by the RBA but has now be improved upon by the team at Coolabah Capital. As shown in the chart below the model is now predicting a 25% increase in house prices between December 2020 and December 2023 (with the range of possibilities being as low as 14% and as high as 36%. This will inevitably lead to a discussion about housing affordability, which we’ll discuss in a future newsletter.
We’re endeavouring to make this newsletter as informative and educational as possible so you have any topics that you’d like us to discuss or financial concepts that you’d like us to explain we’d welcome your feedback to firstname.lastname@example.org