Markets, News, Views, Commentaries…..
The strong rebound in global equity markets in October (as described in our October Newsletter) has run out of steam more recently, as markets finally confront the imminent likelihood of the Fed raising interest rates, and as investors continue to fret about growth in important emerging economies.
Even with the strong October bounce, for the financial year to date since July 1st the US Dow has returned only 1% while the local All Ordinaries, London FTSE, and Hong Kong indices have gone backwards at -2.9%, -2% and -15% respectively. Still, as AMP Capital suggested in a recent newsletter, this means that global shares (excluding US) can be considered quite cheap at the moment which present plenty of opportunity for the skilled investor. See chart below.
On the brighter side, the global economic outlook is still reasonable but there remains a long list of uncertainties that could derail investor confidence in equities. In Australia, very strong jobs data was announced in mid-November, but even if the employment numbers overstate the extent of the pickup, there is other evidence that points to a pickup in the pace of business activity.
The strong jobs numbers aligned with other indicators, suggesting that the Australian economy could, finally, be emerging from the long period of slower–than-usual growth caused by the unwinding of the previous resources investment boom. Westpac Melbourne Institute described their monthly gauge of consumer sentiment in November as “a cracking result” and in an interesting echo of the strong official jobs data, the component of the survey that measures households’ expectations about employment “continues to signal a much less pessimistic attitude towards the labour market than we have seen for a number of years”.
On the other side of the coin, the RBA noted that a flat outlook for company profits continues to be an issue for Australian share investors. Company profits can improve pretty quickly if consumer confidence swings around so let’s hope the survey results stick.
Overall, the most likely outcome is for continued global growth but at a slower rate than usual. The OECD’s latest economic forecasts, for example, expect that global growth will be 2.9% in 2016. There was a great deal of media attention paid to the fact that the OECD had downgraded the prospects for the global economy from the 3.0% growth expected in its previous set of forecasts, but the extent of the downgrade was minimal and the more important message is that the global economy looks set to keep growing at a modest pace.
Exchange rate forecasting is an inexact occupation but, for what it is worth, forecasters believe that the substantial depreciation of the AUD for the year to date has addressed most but not all of the clear previous overvaluation of the AUD. Most of the big bank forecasters consequently expect that the AUD will drop a bit further against the USD, with most of them picking USD 0.69 to USD 0.70 in a year’s time. The exception is the ANZ: Its view of lower domestic interest rates translates into a lower trajectory for the AUD to USD 0.64 at the end of next year.
Sources: AMP Capital, Global Financial Data, ASX, Morningstar Research, Goldman Sachs Asset Management.