Shares and property have had a difficult month. While the global economic cycle is gradually turning for the better, equity and property valuations remain expensive and may continue to struggle as interest rates, particularly in the US, eventually move back to more-normal levels. Expensive asset valuations also leave little room for coping with adverse financial or geopolitical surprises – and Greece is doing its best to add fuel to the fire. Locally, the economy is still growing more slowly than usual and asset markets are still waiting for signs of a clear pickup in business activity. The Aussie dollar has weakened and may have further to fall.
In Australia, after going sideways in March and April, the S&P/ASX200 Index has dropped in May and into June, and it is now down 7.4% from its peak close in late April. The recent decline has unwound nearly all of the gains made earlier in the year, with the index up slightly at 2.2%, though at time of writing this number looks threatened as well.
In terms of an outlook for the local market, not a great deal has changed: The economy continues to potter along at a slower-than-usual rate. Year-on-year rate of growth remained mired well below 3% (at 2.3%), and we note that 3% growth is reckoned to be the minimum required to make decent inroads into the unemployment rate. And world events, Greece for example, continue to throw additional uncertainty into the mix with the ASX taking a decent hit at time of writing on the back of continued stand offs in Europe. (see story below)
But looking ahead, some of the indicators have suggested that the long-awaited acceleration in growth could be approaching. In particular, the latest employment figures were a good deal stronger than expected, and the May business survey from NAB showed a pickup in activity: “Business conditions lifted by 3 points in May, reaching +7 index points–its highest level since October of last year and above the series long run average (+4). This has helped to cement the steady upward trend we have seen in recent months”. And some forecasters believe that growth faster than 3% could be on the cards: The Commonwealth Bank team, for example, is less gloomy than most on the outlook for business investment and, as a result, has GDP growth of 3.3% next year and unemployment dropping back below 6%. AMP’s Shane Oliver is also quite optimistic, tipping the ASX 200 to reach 6000 by year’s end. (see story below)
While markets right now are reacting to daily events in both Greece and China, globally, the recent decline in shares has little to do with the underlying outlook for the global economy which has turned somewhat for the better in recent weeks. In the US, the labour market has performed much stronger than expected and wages have picked up by 2.3% in the past year. And importantly, households appear to be becoming more upbeat, as shown by consumer confidence surveys as well as by more-concrete evidence, such as strong retail sales in May. And remember, the US economy is still the largest economy in the world and its consumers in particular drive growth all around the world including in China. Charts below..
Remember too that the financial markets and the world’s economies are two different things. Volatility has reared in financial markets again in recent days with the ongoing saga in Greece and, at time of writing, global markets look set for a further shake as the 30 June deadline looms and the Mexican stand off continues – for longer than many expected.
Although share market gains have been diluted in recent weeks in most markets (Japan and China being notable exceptions), around the world shares are still posting overall gains so far through 2015. As at mid-June:
- the local ASX 200 is +2.2%.
- the Eurofirst 300 index is up 11.1%
- Germany’s DAX is +12.0%
- France’s CAC is +12.7%
- in the USA the S&P 500 is +0.9%
- the UK’s FTSE 100 is +2.8%
- Japan’s Nikkei is +16.8%
Charts: The charts below show two very important economic indicators. US Unemployment levels are back down to pre-GFC levels and, correspondingly, consumer sentiment is up above long term average levels.
Charts courtesy of Franklin Templeton Investments
Other sources: ASX, Morningstar Research, RBA