Over the past weeks investment markets adjusted to the probability that the U.S. was about to start raising interest rates. This has been the hot topic in financial markets for many months now and overnight the US Fed did exactly that and raised the base rate by 0.25%, the first increase in seven years. There’s more on this topic throughout this Newsletter.
Also playing a particular role across a wide range of asset values has been the unexpectedly large falls in oil and other commodity prices, and the potential for further falls. In coping with these changes, it has helped that economic performance in the developed economies has been reasonably good, and looks to improve a little more next year, though some important emerging economies (notably Brazil and Russia) are struggling.
In Australia, there has been further evidence of very robust employment growth, which has added to other evidence that the pace of local business activity is beginning to pick up. The economic outlook for 2016, while positive, is, however, overshadowed by some significant risks, particularly around China’s likely growth and the direction of global commodity prices.
Australian shares have moved broadly in line with global equity markets, and have been drifting downward since the global rally in October and early November. Year to date the S&P/ASX 200 Index has lost 5.6% in capital value and had an overall loss including dividend income of 1.3%.
Looking ahead, the big picture hasn’t really changed much – forecasters still have the same view that the sharp drop in mining investment continues to hold back the overall growth rate of the economy, despite strong growth in exports (mostly as newly completed resource projects come on stream) and in residential construction.
But not all indicators are pointing in the same direction with households a little worried about GST increases, and the continuing uncertainty surrounding commodity prices and China. On the other hand though, there is still growing evidence that the extended period of slower growth is nearer the end of the tunnel: households, on balance, are still optimistic; NAB’s business survey was upbeat; and the November employment numbers were very strong.
On the Global scene, share prices weakened in November and have continued to decline in December for a variety of reasons. Although there has been generally positive news on economic growth in the U.S., the U.K., the Eurozone and Japan, it has been outweighed by apprehension over an imminent tightening of U.S monetary policy by the Fed, weaker prices for oil and other commodities which have weighed on mining and energy company shares, and some evidence of slower than expected growth in China.
Year to date, after considerable volatility month to month and quarter to quarter, the net outcome is that there has been little overall movement in global share prices, though currency impacts have resulted in positive performance for many clients.
The economic fundamentals for global business activity remain fair rather than strong, with reasonable rather than robust growth ahead for the developed world, offset by patchy performance and rising risks in major emerging markets. More positively, China‘s growth prospects appear to have steadied after official moves to stabilise the previous plunge in Chinese equity markets and to provide monetary stimulus to the wider economy. Our Federal Treasury, in its Mid-Year Economic and Fiscal Outlook released on December 15 is working on a growth rate in China that is slowing, but gently so.
The Table below shows predicted growth rates for global regions. The pattern, except for China, is for year-on-year growth though at slow pace.
(a) Other East Asia comprises the newly industrialised economies of Hong Kong, South Korea, Singapore and Taiwan and the Association of Southeast Asian Nations group of five (ASEAN?5), comprising Indonesia, Malaysia, the Philippines, Thailand and Vietnam.
Note: World, euro area and other East Asia growth rates are calculated using GDP weights based on purchasing power parity (PPP), while growth rates for major trading partners are calculated using export trade weights.
Source: National Statistical Agencies, IMF World Economic Outlook October 2015, Thomson Reuters and Treasury.
Other Sources: MorningStar research/Economic Update, Global Financial Data, ASX,MYEFO (RBA).