Despite quite promising economic data in many developed economies, financial market instability continued to grab most of the headlines through the month of August and into September.  The Australian equity market had its most volatile month for nearly four years in August, closing down 7.8%.      As we reported in last month’s Newsletter partway through August all major global equity markets were falling quite heavily.  By the end of the month falls on the US, UK, German, and Japanese markets ranged between 6.6% and 9.0%.

So far in September we have still seen day-to-day volatility but those same markets have either held their ground or are recording increases of up to 2.2% month to date.

The recent correction in share prices and heightened volatility has been put down to various reasons: worries over the US Federal Reserve’s much talked about interest rate hike, and uncertainties in China and other emerging markets are chief among them. I’ve included an article from AMP’s Dr Shane Oliver later in the Newsletter that helps put this all in context.

But if we put financial markets aside for a minute and look at some economic data we can see some positive trends emerging in amongst the challenges.

In the US: the economy continues its steady growth, 13 million jobs have been created since the GFC.  Unemployment has improved from over 10% to 5.1%, and retail sales are growing at 4%.

In Europe: while some regions will continue to struggle, a more stable banking system is evident and banks are paying dividends for the first time in 7 years.  The ECB plans to continue its money-pumping program for another year, and unemployment rates are now falling (see Figure 1)

China is dealing with the challenges of moving to its next stage of economic development – a consumption/reform stage.  This could be a decade long transition as all parts of its economy are reformed: from banking and credit systems to labour market mobility.  On the plus side China has a very strong balance sheet.  They have a lot of firepower at hand which is good because further stimulus of some sort will be needed.  Numerous analysts we’ve spoken with believe the Chinese Government will manage through the transition without need for a hard landing. While questions abound over the accuracy of Chinese growth figures, underlying measures such as electricity production and job creation remain strong.  The government’s annual target of creating +10 million new urban jobs per year remains on track as it has for the past decade (see Figure 2)

The Chinese economy is slowing, for sure, and this impacts on Australia.   It is a real weakness that some 6%-7% of our GDP is represented by exports to China and as a result our economic growth is slowing – we are still growing, but at a sluggish pace.   Unemployment is at quite high levels and household debt /income ratios are at new highs of around 160%, but low interest rates are keeping repayments affordable.   The lower dollar is expected to help sectors such as tourism, education, and agricultural exports take up some of the economic growth slack.

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Sources:  ASX, Morningstar Research, CFSGAM, Magellan Asset Management.