Investment insights

Want to know the stories behind the numbers? We had Chris talk us through the latest market activity and what’s on the horizon:

After four eventful years, a new US President was inaugurated in January 2021. After a pared-back ceremony, President Joe Biden quickly got to work, signing 30 executive actions in his first three days in office.

Among the first executive orders signed by Biden were reversals of President Trump’s US withdrawal from the World Health Organisation (WHO) and from the Paris climate accord.

Beyond executive orders, one of the first big-ticket items President Biden will be looking to push through Congress in the coming weeks is his US$1.9 trillion coronavirus relief package.

Dubbed the ‘American Rescue Plan’, CNN explained that the package would provide rental assistance for low- and moderate-income households who have lost jobs during the pandemic, enhanced unemployment aid, support for child care, and more.

Biden also wants to introduce a US$15 hourly minimum wage for all federal government employees. Under the proposed plan, the minimum wage would rise in phases from US$7.25 to US$15 over five years.

The Democrats’ win of two Senate seats in a run-off election in early January may provide Biden a clearer path to enacting these measures. With these two seats, the Senate is now split 50-50 between Democrats and Republicans, with Vice President Kamala Harris able to cast the deciding vote in the event of a tie.

The market has reacted positively to Biden’s transition to power. According to research firm CFRA Research, the S&P 500 index rose 14.3% between election day and inauguration day, marking the best gain for any first-term US President since World War II.

The Reserve Bank of Australia (RBA) kept the cash rate on hold at the record low of 0.1 per cent at its February 2020 meeting, with Governor Philip Lowe stating this rate will not increase until actual inflation is within the RBA’s target range of 2-3 per cent.

“For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market,” Lowe explained.

According to Lowe, the RBA doesn’t expect these conditions to be met until 2024 at the earliest.

Despite this, the RBA believes the outlook for the global economy has improved over recent months thanks to the development of COVID-19 vaccines.

“In Australia, the economic recovery is well under way and has been stronger than was earlier expected,” he said.

With Australia officially making its way out of the recession in the September 2020 quarter, the RBA expects Australia’s gross domestic product (GDP) to return to its end-2019 level by the middle of this year, and grow by 3.5 per cent over both 2021 and 2022.

While more positive outcomes around the COVID-19 vaccine and its rollout could lead to stronger growth than is currently expected, Lowe added that, conversely, disappointing news on this front would delay the economic recovery.

“An important near-term issue is how households and businesses adjust to the tapering of some of the COVID support measures and to what extent they will use their stronger balance sheets to support spending,” he said.

According to Lowe, the RBA remains committed to maintaining “highly supportive monetary conditions” until its goals are achieved.

Our investment team will also be keeping an eye on the Australian dollar, which recovered from a low of 57.4 US cents in March 2020 to end the year sitting around 75-76 US cents.

Though it may sound counterintuitive, particularly as we’re used to keeping an eye out for a good exchange rate forn an overseas holiday, a weaker Australian dollar can help stimulate the local economy. A weaker Australian dollar means that the goods and services that Australia sells offshore are cheaper, and demand for these may increase as a result.

So, what drives the Australian dollar? According to Chris, there are a few things to look out for.

“Interest rate differentials are very important. If there’s a material difference between real interest rates in Australia and the US, for example, the currency that has the higher real interest rate is therefore more attractive, leading to more investment in that currency,” Chris explained.

The Australian dollar can also be seen as a proxy for China, Chris added.

“If China’s growth is strong and they’re building infrastructure and importing a lot of goods, then the chances are they’re buying a lot of goods from Australia, like iron ore for steel production for example. In turn, the Australian economy benefits,” he explained.

“Because of that link between Australia and China, investors may look at China’s growth and expect related growth in Australia, leading to investment in the Australian dollar.”