Just recently in June, I celebrated the 18th year anniversary of the Fidelity Australian Equities Fund. I have always managed the Fund for evolution rather than a revolution, and this has served us extremely well, particularly through crises like the COVID-19 pandemic.
While the impact of coronavirus on people’s lives has been much more negative than originally thought, the impact on the economy and markets has been much more limited than expected.
Australia was relatively resilient over the last year and I believe it will remain a preferred geography in which to invest, work and study. We saw the acceleration of existing trends such as e-commerce, digital delivery of food and beverages, cashless transactions, work from home, and a preference for active versus formal wear. These trends have expanded the universe of investment opportunities as more innovation and business models have come to the market.
The divergence we are seeing between the severity of the pandemic and the impact on the economy is due to government and central bank stimulus. Both responses have been extraordinary and created strong tailwinds behind the economy and asset prices. However, a full recovery will be dependent on the vaccination rollout and the re-opening of national borders.
As the economy grows and demand strengthens, inflation is creeping up. However, I believe that the recovery will need to be sustained for a couple of years, for demand to reach pre-pandemic levels and therefore it will take some time for inflation to reach a meaningful level.
We have seen central banks try to keep interest rates as low as possible for as long as possible to ensure strong growth. High growth and low interest rates should also help with the natural repayment of government debt, which has significantly increased through the pandemic.
Our own Reserve Bank of Australia (RBA) has also highlighted that they do not believe they will have to significantly increase interest rates until 2024 – which is when they think we will start to see real wage growth. It is fair to say that the market does not believe them, and has priced in higher interest rates sooner.
My view is that interest rates will go up, but because of the current temporary inflation, we’ll see volatility increase and interest rates take on a shark-tooth type of trajectory. I am much more in the longer-term camp that says official interest rates will increase over an 18-month to two-year period.
The recovery is well underway, and I think in five years’ time we will look back on this period as having been an excellent time to have invested in the equity market for the long term. Having said that, investors should not expect this to be without volatility along the way.