Global equity markets did not have a great time during May.   After a significant recovery from January to April the US Dow Jones and UK FTSE, for example, dropped 6.7% and 3.5% respectively though at the time of writing have clawed back about half these losses in early June. 

The Australian equity market did better than the rest of the world, recording gains of 1.1% in May. This was partly because of the surprise result from the 18 May Federal election, which allayed fears of new investor-unfriendly policies being imposed, and partly because of clearer signs from the Reserve Bank that interest rate cuts are imminent.  Indeed in its June meeting on June 4th, the RBA did cut the official cash rate to 1.25%, the first rate movement in almost three years.

Globally, the prime source of concern remains the escalating trade dispute between the US and China, leading markets to worry that slower global trade could push the US closer to recession in the near term. This was despite further signs of strength in the US labour market and household sector. The equity markets’ recession fears were compounded by the bond market pushing yields down even further and delivering a flat/inverted yield curve once more. Despite reasonable arguments to the contrary, markets still believe an inverse yield curve is a sure sign of imminent recession. In the absence of a clear statement from the US Federal Reserve that it would be prepared to cut interest rates if necessary, most overseas equity markets sold off quite aggressively.

In his presentation at our Client Seminar on June 3rd, CommSec’s Ryan Felsman had lots of interesting slides to visualise for us the following main points:

  • global growth had lost momentum.
  • the US economy however was experiencing solid growth.  Their Budget deficit is worsening, though not as bad as the post-GFC years
  • China’s growth is slowing but appears more sustainable. 
  • Either way, China drives Queensland…….  Queensland’s exports to China are at record highs as are Chinese tourists to our great State.  And do they spend much?  Yep, +13% to $6bn each year.
  • Shares:  financial conditions are favourable, but expect more volatility ahead due to geo-political risks.
  • The Australian economy can expect solid jobs growth but weak income growth.  This will lead to weaker consumer spending…….
  • …..which means RBA interest rate cuts in order to stimulate.  Good chart below shows the impact on disposable income of (i) wages growth, (ii) a rate cut, and (iii) tax cuts

Here’s a couple of slides, with plenty more in Ryan’s presentation.  Please let us know if you’d like a copy.

And the CommSec tips for the coming year are:

Sources:  CommSec, Quilla Consulting, RBA, MorningStar Research, Bloomberg.