Year in Review: Australia – The Bull

Most recently, in June, I celebrated the 18the anniversary of the Fidelity Australian Equities Fund. I have always managed the Evolution rather than Revolution Fund, and it has served us extremely well, especially during crises like the COVID-19 pandemic.

While the impact of the coronavirus on people’s lives has been much more negative than originally thought, the impact on the economy and the markets has been much more limited than expected.

Australia has been relatively resilient over the past year and I believe it will remain a prime geography for investing, working and studying. We have seen the acceleration of existing trends such as e-commerce, digital food and drink delivery, cashless transactions, working from home, and a preference for sportswear over formal wear. These trends have widened the universe of investment opportunities as more innovations and business models have entered the market.

The discrepancy we are seeing between the severity of the pandemic and the impact on the economy is due to stimulus measures from the government and the central bank. Both responses have been extraordinary and have created strong favorable winds for the economy and asset prices. However, a full recovery will depend on the deployment of vaccination and the reopening of national borders.

As the economy grows and demand strengthens, inflation rises. However, I believe that the recovery will have to be sustained for a few years, for demand to reach pre-pandemic levels and therefore it will take some time for inflation to reach a significant level.

We have seen central banks trying to keep interest rates as low as possible for as long as possible to ensure strong growth. High growth and low interest rates are also expected to contribute to the natural repayment of public debt, which increased significantly during the pandemic.

Our own Reserve Bank of Australia (RBA) has also emphasized that it doesn’t think it will have to raise interest rates significantly until 2024, when it believes we will start to see growth. real wages. It’s fair to say that the market doesn’t believe them and built in higher interest rates earlier.

My opinion is that interest rates will rise, but due to the current temporary inflation we will see volatility rise and interest rates take a shark-tooth path. I am much more in the longer term camp that official interest rates will increase over an 18 month to two year period.

The recovery is off to a good start, and I think five years from now we will see it as having been a great time to invest in the equity market for the long term. That said, investors shouldn’t expect this to be without volatility along the way.


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