Investors shift to cash at quickest rate since March 2020
03-05-2021
George Lucas, Raiz Group CEO
First let’s take a look at equity markets. Even as the equity markets put in strong performances in April, we’re seeing investors switching into cash at the fastest rate since March 2020.
This is driven, in my opinion, on changing expectations about whether stock markets will continue rallying now the US economic recovery is firmly under way.
Another driver is the potential of a large increase in the capital gains tax in the US to around 43 per cent, from the current 23.8 per cent. The thinking here is that it’s better to realise capital gains now to avoid disappointment if the tax rate does rise. I think this trend is likely to last.
S&P 500 reaches new high
Still in the US, the S&P 500 has gained 88 per cent since its March 2020 low and we saw it rally beyond 4,200 points to a new closing high last week. That result came after the US recorded an annualised pace of economic growth of 6.4 per cent in the first quarter.
More than 300 companies listed on the S&P 500 have reported first-quarter results so far this quarter, showing an increased earnings per share at an average of 51 per cent compared with the same period in 2020. Notably, this news has been baked into share prices for a while.
Interestingly, we’re seeing many investors position themselves into industrial commodities, such as copper, that are in short supply following a swift resumption of demand in the US and Europe. This trend is also being driven by the prospect of inflation.
At the same time, it appears investors are positioning themselves for further falls in the prices of longer-dated US Treasury bonds, which offer lower investment returns as inflation rises.
Indonesia economy continues to recover
In Asia, Indonesia continues to recover, and I think that data this week will show the contraction in Indonesia’s GDP eased to 0.5 per cent year-on-year. Indonesia posts Q1 GDP data Wednesday.
Officials in Indonesia have described the recovery trend there as “very convincing”, citing improving leading indicators in March and an expected acceleration of economic growth in the second quarter.
Meanwhile, Malaysia’s central bank meets on Thursday, with expectations that Bank Negara Malaysia will keep interest rates at a record low of 1.75 per cent.
Australia core prices hit record low
Locally, the big economic news was data showing Australia’s core inflation decelerated to the slowest pace on record as a range of government programs reduced costs in the economy.
The data revealed annual trimmed mean core inflation eased to 1.1 per cent in Q1, which was the weakest reading in a series dating back to 1983. Core inflation advanced 0.3 per cent from the final three months of last year, beneath economists’ estimates of a 0.5 per cent rise.
This week sees the RBA meet on Tuesday, with the central bank tipped to keep its key policy instruments unchanged, including holding the cash rate steady at its record low 0.10 per cent .
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