Mark Lister, July 2021

The June quarter of 2021 is behind us and the shortest day has been and gone. We’re officially closer to next year than last year, so it’s not a bad time to take stock of financial markets at this halfway point.

World shares rose 12.6 per cent during the first six months of the year, which sees them a stunning 39.9 per cent higher than a year ago.

Let’s not forget that markets were suffering from the pandemic a year ago, but relative to the end of 2019 (before most of us had even heard of COVID-19) world shares are still up an impressive 31.5 per cent.

Most markets have performed very well in 2021, with the US, Europe and Australia all providing impressive double-digit gains. With the NZ dollar down against most major trading partners this year, investors in international shares will have received an added tailwind.

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The local market has bucked the global trend, with the NZX 50 index down 3.3 per cent over the first half of the year.

You’d almost look at those numbers and assume our economy must be facing some major challenges. That’s not the case, and we’re in better shape than most, in fact.

The NZX 50 dominated by defensive companies in sectors like utilities, real estate, infrastructure and healthcare, many of which are also very good dividend payers.

These types of businesses proved very resilient during the worst of the pandemic, but in 2021 investors have refocused on sectors and companies that have more to gain if the recovery continues. Markets like Australia and Europe have more of that latter group, which has seen them perform better of late.

Commodity prices have been strong over the first half of the year, with oil rebounding more than 50 per cent after a tough 2020 and global dairy prices increasing more than 20 per cent. Gold prices haven’t fared so well. Prices have slipped this year as investors haven’t felt the need to hunker down in haven assets.

Similarly, bonds and fixed income have been relatively poor performers in 2021, with rising interest rates reducing the appeal of these asset classes and impacting market prices. That’s normal coming out of a recession, and we shouldn’t forget that fixed income played its part well for much of last year.

There’s plenty of good news looking ahead, including the vaccine rollout which is in full flight across the world. As at the end of June, 66 per cent of people in the UK and 54 per cent of those in the US had received at least one dose.

Europe has also been tracking well, with vaccination rates in Germany and France at 55 and 50 per cent respectively (compared with just 12-13 per cent three months ago).

This has allowed restrictions to be gradually lifted, and it has seen a strong upswing in economic activity, particularly across the services sector, which was hit hard by the lockdowns.

The corporate earnings picture also looks bright. The S&P 500 in the US is expected to deliver aggregate earnings growth of 35.5 per cent for the 2021 calendar year (compared with 2020), which is a lot more upbeat that the 26.3 per cent forecast from three months ago. It’s rare for sharemarkets to do badly when earnings are growing that strongly.

On the other side of the coin, this resurgence in activity has brought inflationary pressures with it, a trend we’re seeing right across the world, including here. Businesses are feeling the effects of rising costs, and you can be certain they will pass these onto their customers, as much as they can.

Several major central banks look ready to signal the withdrawal of the economic life support that has been provided over the past year or so, and this change looms large as the most important dynamic for the balance of the year.

The Bank of England and Bank of Canada have reduced the pace of their asset purchases, the Federal Reserve in the US has brought forward projections for its first interest rate hike, and our own Reserve Bank is now expected to complete its asset purchase programme and increase the Official Cash Rate sooner than previously thought.

It’s been a very lucrative six months for investors, but as always, the future looks a little murkier.