Markets, News, Views, Commentaries (June 2017)

Markets, News, Views, Commentaries….. 

Most asset classes have done well. Bond yields have dropped back, despite the Federal Reserve tightening US monetary policy, as investors reckon that the strong fiscal stimulus they previously expected from the incoming Trump administration will, at a minimum, be delayed. Equities have benefited from both lower bond yields and from more evidence that the global economy is improving.   At home, the jury is still out on whether the economy will break out of its subpar period of economic growth.

In Australia, the latest official data on how the economy has been travelling showed that the economy grew by a scant 0.3% in the March quarter and by 1.7% a year earlier. At face value that looks a poor outcome, but there can be quite a lot of statistical “noise” from one quarter to the next, which can suggest more is happening than is actually the case. Forecasters had in fact been expecting a low number around the 0.3% mark after quite a high 1.1% outcome in the December quarter, so the outcome came as no surprise to the financial markets. Averaging out the two most recent quarters at 0.7% growth per quarter probably gives a better read and shows an economy growing at something like a 2.5%-3.0% annual pace.

Echoing last month’s Commentary, most recent economic data is pretty good and the latest business surveys are also encouraging.  Notably, all three of the Australian Industry Group’s sectoral indices (Manufacturing, Services, Construction) signal “expansion” whereas previously they have been a mixed bag with some doing well and others not so.  See Charts, below.      And following its latest monthly business survey, NAB commented that “the strength looks to be quite broad-based, with all industries recording positive business conditions for only the second time since 2010–although conditions are only neutral for retail in trend terms, weighed down by the softer trends in the household sector.”

Overseas, in mid-June the US Federal Reserve raised the Fed Funds Rate by 25 basis points which was expected by the markets.  This was the fourth rate hike this cycle which took the Fed Funds Rate to 1.12%. The vote was supported by 8 of the 9 bank governors – there was one dissenter to the rise (Governor Kashkari from the Minneapolis Fed) but the committee on the whole maintained its median forecast for one more rate increase in 2017, detailed its views on inflation, and provided more information on their balance sheet reduction plans.

Interestingly, they also announced the Fed would start running down the massive USD$4.5 trillion stockpile of bonds it had accumulated during its quantitative easing programme. Up to now, it has been reinvesting all the funds that became available as bonds in its portfolio matured: This has meant it has been reinvesting a bit more than USD$40 billion per month – the numbers are staggering. The Fed has not said exactly when it will change its approach, but sometime this year it will likely stop reinvesting all the maturing funds. Following what Fed chair Janet Yellen called “a very gradual and predictable plan,” the Fed will initially stop reinvesting USD$10 billion per month, and will go on to reinvest less and less each quarter thereafter.  “Gradual and predictable” is the key.

With regard to global shares, performance in recent months has been generally quite healthy despite coming off a little in recent weeks.   Two significant reports in the past fortnight have noted that the global outlook is reasonably good if not outright strong.  The first of these was from the World Bank which expects world growth of 2.7% this year up from 2.4% in 2016, and then forecasts 2.9% in 2018 and again in 2019. The OECD in its latest Economic Outlook was more optimistic in forecasting 3.5% for 2017 and 3.6% for 2018. Even further, it noted that “there are upside risks to the projections for investment, trade, and productivity”.

Both organisations noted the main risks as being geopolitical shocks and trade protectionism. As I relayed in last month’s Newsletter, the consensus view of investment managers we speak to is that solid economic fundamentals will overcome geopolitical uncertainty.

And speaking of geopolitical jitters, here is a cheery little chart from Shane Oliver’s “Brexit – one year on” article, which can be found further down the Newsletter…..

The Aussie Dollar:   There continues to be mixed views on the outlook for the dollar – see my comments in last month’s Newsletter. MorningStar notes that “the most prevalent view is that the AUD will depreciate (against the USD) to around USD$0.70 by the middle of next year, and one can see good reasons for that view. They include interest-rate differentials potentially moving in favour of the USD and, for investors who view the AUD as a “commodity-backed” currency, further weakness from lower commodity prices. On the other hand, if you have a relatively upbeat view of the Australian economy, as the Commonwealth Bank does (3.3% GDP growth expected for 2018), Australia might start to look a more interesting investment destination.  The Commonwealth team accordingly have the AUD rising further, to USD$0.78 this time next year.”  At the time of writing, the $A buys USD$0.76.

Sources:  Morningstar Research; CBA Research & ComSec; RBA, Ausbil, Perpetual Investments of (Matt Sherwood).