Six Park’s Investment Advisory Committee is responsible for overseeing our investment strategy – it’s an important role, and the experience of our committee is a key part of the service we provide.
Our Investment Advisory Committee, which meets at least six times a year, is made up of former JP Morgan Australia chairman Brian Watson AO, former federal Finance Minister Lindsay Tanner, and Mark Nicholson, the former co-Chief Investment Officer (Investment Department) of the World Bank – some of Australia’s leading financial minds.
Portfolio asset allocations remain unchanged following the committee’s first meeting for 2021. The committee members shared their observations on the global and Australian economic climate, with three key takeaways emerging throughout the meeting.
1. After a uniquely challenging year, the global economic outlook for 2021 has improved beyond previous expectations.
The committee considered key data points from the US and China (the world’s two largest economies) related to GDP growth and the labour market, which suggest that 2020 ended better than most people expected.
In fact, the US Congressional Budget Office has recently raised expectations that US GDP and labour market conditions may return to pre-pandemic levels by mid-2021 and 2022, respectively. The speed of this rebound would have seemed unlikely only several months ago, with many economists re-forecasting global growth expectations upwards.
The drivers of this improved outlook align with guidance from our previous IAC update:
- The global vaccine rollout is accelerating, albeit with some challenges in distribution;
- It still appears that interest rates will remain historically low over the course of 2021;
- We’re seeing ongoing stimulus policies in the wake of the pandemic to prop up the US and Chinese economies, further supported by President Biden’s likely US$1.9 trillion relief plan;
China has recovered better than most would have expected (with positive GDP growth of 2.3% in 2020, and having flattened the local COVID-19 curve), which provides a signal that economic conditions, generally, have started a more significant recovery phase.
These tailwinds suggest a positive market outlook for 2021, recognising that there are always market risks (outlined later).
IAC member Lindsay Tanner also commented on the political situation in the US:
“Although the Democrats now occupy the White House, their Senate majority is only possible with a deciding vote of Vice President Kamala Harris, the implications of which are that the more radical Democrat agenda items will likely be difficult to be enacted. How this will play out in practice is yet to be seen, but it is likely to bring a measure of predictability and stability to political and policy activities in the US, which should be a net positive for markets.”
Six Park IAC chairman Brian Watson noted:
“In any given year, share markets will have orderly corrections, so that will likely happen at some point in 2021, but the tailwinds of today lead us to believe that 2021 will be a positive year for global markets. Significant downside risks such as inflation and the prospect of the tapering of stimulus seem to have been pushed out into 2022. As always, we will watch for negative signals, but we see no need to alter our investment asset allocations at this point in time, and counsel our clients to remain patient and invested in the markets. If 2020 taught investors one key lesson, it’s that patience is an investment virtue.”
2. Australia continues to look well positioned for the global recovery.
Several factors, including those noted below, suggest that Australia remains well positioned to recover from the impacts of the pandemic:
- The domestic housing market has thus far navigated its way through the pandemic period relatively unscathed, arguably stronger than many expected and thus avoiding what could have been a major problem, impacting multiple areas of the economy (such as housing, finance and lending, and consumer confidence).
- All signs are that the RBA will continue to keep rates low at least into 2024, and will maintain its program of quantitative easing, which together will provide a strong ongoing tailwind for the economic recovery and equities as an asset class.
- Very substantial Federal and State fiscal support will continue to stimulate economic growth for the next few quarters.
- The resilience of the Chinese economic recovery is, on balance, good for Australia given China’s global importance as a commodity importer.
IAC member Mark Nicholson noted:
“The combination of these factors, together with Australia’s relatively effective management in containing the spread of COVID-19, has resulted in a more limited economic impact than seen in most other regions, which will likely enable Australia’s overall level of economic activity to return sooner to its pre-COVID path than in the US, the EU and Japan.”
3. The medium to long-term outlook suggests Six Park’s current portfolio asset allocations remain appropriate.
The IAC recommended that current portfolio asset allocations remain unchanged. They do not currently observe any medium to long term structural shifts for expected asset class performance that comprise our portfolio constructions. This approach to minimising “tinkering” with investment parameters has held Six Park clients in good stead, as such tinkering has been demonstrated to negatively impact investment returns.
Key “watchlist” items
Finally, as always, there are several key risks that the IAC discussed and will observe on an ongoing basis. These include:
- The prospect of pandemic mutations accelerating to a point where the distribution of vaccines doesn’t have the positive impact currently expected on controlling the spread of the virus;
- Inflation rising faster than expected, which could spook markets due to the concern of fiscal stimulus slowing down (the committee views this as unlikely in 2021);
- The potential for trade dispute rhetoric between China and the US to escalate into more significant action (the committee views this as more posturing but will watch closely following the change in the White House);
- A significant re-emergence of COVID-19 in China that seriously disrupts its economic recovery.