Markets, News, Views, Commentaries (July 2016)

Global financial markets have recovered from their June sell-off after the United Kingdom’s Brexit vote. Bond yields, which had dropped to exceptionally low levels as safe-haven assets were snapped up post-Brexit, have picked up modestly, while equity prices have advanced both at home and overseas.

It has been reassuring to see the world’s major financial markets rebound in these first few weeks of July after an uninspiring year to June 30, 2016:

  • ASX200 is up 5.9%
  • US Dow Jones Index is +3%
  • Hong Kong is +6.3%
  • Germany is +5.8%
  • Japan is +7.5%

In Australia, the business cycle may be picking up a bit, but possibly not enough to justify further substantial gains for shares and property, which are now on the expensive side of normal valuation yardsticks. The Reserve Bank looks set to cut interest rates a bit further.

Looking ahead, the global economy looks set to continue to grow albeit at a slower than usual pace. This will provide some support for global equities, although there are a number of potential downside risks which could materialise. Bond yields are likely to remain “lower for longer”, which will maintain demand for alternative sources of yield (notably property and infrastructure, and equities in higher yielding equity markets).

Global economic activity continued to progress, though more obviously in the U.S. than in other developed economies, monetary policy was likely to continue to provide ample liquidity and to encourage investors to look favourably at equities on relative valuation grounds. There were, however, a range of downside risks, and although modest rates of economic growth remained the most likely scenario, investors should be prepared for further episodes of anxiety-driven volatility.

One important example of the solid improvement in US economic conditions is the unemployment rate.  While there is always question marks over the measurement of employment and under-employment, the chart below shows steady and solid jobs generation with the unemployment rate halving from a GFC-high of around 10%.

image001

Sources:  Morningstar research/Economic Update July 2016; RBA, Bloomberg, Kapstream.