The Australian share market has largely moved sideways during the first quarter of 2021.
After a volatile year, which saw markets plunge nearly 40 per cent in March 2020 due to COVID-19 pandemic fears, the Australian Stock Exchange (ASX) bucked predictions and added 10 per cent in the final quarter of 2020.
Those surprising gains may have been retained in the first quarter of 2021, but little has been added since.
Hopes of recovery
With COVID-19 vaccines now rolling out around the world and the new Biden administration securing approval for its US $1.9 trillion stimulus package, it appears investors have begun to believe a global economic recovery is on the horizon.
And while there may still be a long way to go – especially in developing economies – global markets appear to be reflecting a sense that the worst of the pandemic is behind us.
Banks and resources bounce back
On the back of a good rise in bond yields and commodity prices in the first quarter of 2021, banks and resource stocks have rallied.
The Australian dollar, which came under pressure when commodity prices were hit by the drop in demand during the height of COVID-19 shutdowns in Asia last year, has also rallied on the back of these rising bond yields and recent increased commodity process.
This has put pressure on stocks that generate significant earnings outside of Australia, and some sectors such as healthcare have seen a slight fall in some share prices as a result.
The overall improvement in growth has also sparked concern over a potential rise in inflation, with some experts warning of an increase in prices in 2021 as more businesses reopen, vaccine programs are rolled out, and consumers rush to spend after more than a year of pandemic-era restrictions.
But this inflation is not expected to be widespread or sustained, which means a significant spike in interest rates seems unlikely.
Looking ahead
As the easing of COVID-19 restrictions bolster economic activity and demand, the outlook for the Australian share market remains generally positive for the year.
This, combined with ongoing accommodative monetary and fiscal policy, should be encouraging news for investors.
Potential inflation and the prospect of a rise in interest rates and bond yield does pose a risk to equities, as would any further setbacks in the movement to a post-COVID-19 world.
Do you need share market investment advice?
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