Markets, News, Views, Commentaries…..
2016 has started badly for many asset classes, with global equities of all kinds sold off heavily worldwide, but especially in the emerging markets. The numbers are pretty ugly.
The main concerns have been the potential impacts of slower Chinese economic growth and falling commodity prices. Government bonds have benefited as investors have sought refuge from the equity sell-off, but lower-quality bonds have weakened as investors have become more risk-averse.
Looking ahead, the most likely outlook is for continued modest global economic growth, which should provide some floor support to global shares, though there is a risk that investors could remain too anxious to invest and could set off a further cycle of self-fulfilling selling.
Interest rates, both locally and internationally, now look likely to rise more slowly (if they rise at all). In Australia, the most recent data are inconclusive, and there is still no clear sign that the pace of business activity has picked up. There are ongoing risks as well, notably around commodity prices.
In Australia, most of the key business and consumer surveys have yet to get going for 2016, but on the limited evidence of what is available, there have been mixed indicators that in aggregate suggest the economy is still growing at a slower than usual rate.
On the plus side, one especially positive development was the news that the labour market in December performed well. On the other hand, consumer confidence has been sliding. Households are not outright unhappy–although the latest weekly readings from the ANZ/Roy Morgan consumer confidence survey have been falling, they have only dropped to around their long-term historical average–but they are clearly of two minds. They are happier about their own financial situation, which likely reflects a mix of a stronger labour market, lower mortgage costs, and cheaper petrol. But they are increasingly concerned about the longer-term outlook for the economy.
On the Global scene, 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. The overriding issue remains whether investors are paying a reasonable price for global growth that is running a bit slower than usual.
Official data support a modestly upbeat outlook:
- Recent economic data in the U.S. in particular has been positive—its labour market continues to perform well.
- The Eurozone grew by 0.3% in the September quarter, much the same as the 0.4% recorded in the June quarter. Even though the pace of growth is still quite slow, it also means that the Eurozone is gradually turning for the better.
- If there is reasonable, but far from stellar, growth in the developed economies, the global outlook is complicated by difficult economic conditions in a number of important emerging markets, notably Argentina, Brazil, Russia, and Venezuela. A combination of the lower oil price, poor governance, and political risk have produced recessions in all but Argentina, and even in Argentina expected growth is marginal (only 0.3% in 2016, according to the Economist magazine). 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; China is now expected (in the latest, December, poll of international forecasters by the Economist) to grow by 6.4% in 2016.
Given the global market emphasis on the outlook for China and its likely implications for world financial markets, Morningstar’s January “Expert Asset Allocation Panel” meeting had discussed it at some length. Panellists were, on balance, inclined to the view that world markets could be over-reacting to a Chinese slowdown; it had been abundantly clear for a considerable time that China, for a variety of reasons, was not going to be able to maintain its previous breakneck pace of economic development. A slowdown in Chinese growth, in the panel’s view, should not have come as shocking news to the financial markets. And they note that it is still “growing at a rapid rate”. Growth of 6.9% in 2015 would be regarded as remarkably strong numbers in any other country, let alone one with an economy so large.
Sources: MorningStar research/Economic Update; RBA. Chart: Goldman Sachs/Bloomberg/Nat Bureau Stats China