Equity markets have staged a strong recovery from the sharp sell-off of January/February, although in most cases, the recovery has not yet clawed back all of the earlier losses. Investors appear to have become less nervous about a range of risks (the global economy, U.S. monetary policy, China, emerging markets, the impact of low oil prices, banking sector stress).

Overall, the global outlook is for further slower-than-usual growth in the world economy, albeit with downside risks, which could yet provoke further periods of volatility. In Australia, there are signs business activity in the non-mining economy is picking up pace, while the miners have benefited from a turnaround in global commodity prices.

Although the Australian economy has been doing reasonably well, Australian shares were sold off, in line with global markets, up to mid-February. More recently, it has been a beneficiary of the global recovery in equity investor confidence, although the recovery from the market low on 12 February has not been quite strong enough to take the market into positive territory for the year. The S&P/ASX 200 Index is still down year to date by 2.4% in capital value and by 1.2% in terms of total return.

Similarly, the good news in Global share markets is that, after a sharp fall in January and into the second week of February, we have seen a strong recovery since. The bad news is the recovery has not yet clawed back all of the earlier losses with the S&P 500 Index now down 1.1% for the year and the FTSE 100 down 1.6%, both are good turnarounds from the numbers we reported to you in last month’s Newsletter.    In Europe, France’s CAC Index and Germany’s DAX have bounced back similarly, though negative returns of 3.1% and 8.5% respectively are recorded for 2016 to date.

Looking forward, in Australia, recent business surveys show a strengthening picture that may come as a surprise to some. The Australia Industry Group, or AIG, sectoral indices for February, for example, were quite positive. Manufacturing has been growing for the eighth month in a row, the services sector turned around from contraction to expansion.

And the latest monthly National Australia Bank business survey was noticeably strong. The National Australia Bank team commented “The Australian economy appears to be performing better than many had expected, and this month’s business survey gives no signs that this is wavering”.  Actual business “conditions” (as opposed to business “confidence”) are a composite of firms’ actual trading, employment, and profitability. National Australia Bank have looked at how this correlates with GDP, and at current levels of business conditions, the Australian economy could well be growing at about a 3.5% annual rate, a clear step up from the 2.8% year-on-year growth recorded in the December quarter.

According to research house Morningstar, “While there have been previous instances of the domestic cycle appearing to pick up only to relapse into subpar growth, and while international volatility could spring unpleasant surprises (if, for example, the recent turnaround in commodity prices fails to hold), the backdrop could well be coming together for Australian equities”.

Looking ahead globally, the recent recovery in world shares reflects better-than-expected developments on most of the issues that had caused the selloff in January and early February.  Commodity prices, oil for example, have been on the rise lately and even though some of these gains may not hold, Morningstar notes that share markets simply “seem no longer as concerned about crises in commodity markets and their potential spillovers”.  They make similar observations of the recent China-concerns noting that “earlier fears of an immediate sharp slowdown in Chinese growth now look overblown”.  [There were plenty of analysts putting forward this view all along…].

Still, we would be sensible to expect further episodes of volatility in coming months as (over)reactions will continue whenever there is negative commentary on global growth prospects, China, emerging economies, general financial sector vulnerabilities, and whatever else becomes the next hot topic.

The following chart shows the unemployment rate in the US and Japan improving back to pre-GFC levels while the Euro unemployment rate is on the improve but remains historically at high levels.

Unemployment Rate

Sources:  MorningStar research/Economic Update; RBA.  Chart:  Thompson Reuters, RBA