Prior to the big Vote in the UK my monthly summary for this Newsletter was looking like this, and I think these points remain fundamentally relevant:
- Volatility across all financial markets remains heightened for the foreseeable future as the downside risks to global business activity continue to be reassessed. [This will be under even greater scrutiny now]
- On the positive side, assets seen as defensive (property, infrastructure, government bonds, gold, the yen) have been beneficiaries of heightened investor concerns
- In Australia, the business cycle is improving, though growth is not yet consistently back up to pre-mining-boom rates
- The latest (May) monthly business survey from National Australia Bank was also encouraging. Business “confidence” may have dropped a little–the NAB team suggested the general election may have played some part–but “confidence” tends to be a fickle indicator. A better insight into what is happening is NAB’s measure of business “conditions,” which is a mix of what is actually happening to businesses’ sales, profits, and employment. NAB’s “conditions” measure is much more upbeat: As NAB commented, “Business conditions remained at an elevated level in May (at +10 index points), which is an above-average result and close to post-GFC highs…The elevated level of business conditions (unchanged from last month) was due to a notable improvement in trading (sales) and profitability, which offset a disappointing moderation in employment demand.”
- The outlook for international equities remains much as it has been all year–shares have the benefit of ongoing global economic growth, but they are expensively priced for the growth that looks likely and are prone to sell-offs when any of a number of potential downside risks to global growth looks like materialising. [This has been clearly demonstrated since the Brexit vote].
- Global business surveys confirm the mediocre growth in economic activity. The modest outlook is also beset with what the World Bank called “pronounced downside risks.” Its short list of immediate issues included further slowdown in major emerging markets (especially among commodity exporters), rising policy uncertainty (the bank mentioned Brexit but could also have added Trump), persistent geopolitical risks, financial market fragility, stagnation in the advanced economies (Japan and the eurozone in particular), and increasing protectionism. It could only think of one potential upside (the benefit to consumers from lower oil prices).
Interesting Chart for this month comes from a story in Chris Cuffe’s ‘Cuffelinks’ newsletter (see full story here – Where is Australia’s future growth), and shows the mix of industries as a share of GDP as recorded by the Australian Bureau of Statistics. The domination of service industries is interesting to note, as is the relatively small part manufacturing plays these days.
Sources: Morningstar research/Economic Update May 2016; RBA, Cuffelinks.