Economic Snapshot – FY17 & Outlook for FY18

Economic Snapshot – FY17 & Outlook for FY18

In Summary

If ever investors wanted proof that uncertainty and political events in markets is a fuse to volatility but that economic fundamentals win, 2016/17 would be a good case study. Despite fears of an uncertain geo-political world results were strong in all equity markets – the area volatility excels.
Financial markets commenced 2016/17 in the wake of the Brexit result just a few days before and offered a frightening outlook. At the same time we had looming elections in Europe, where extremist candidates seemed to be making headway, as well as an unheralded US Presidential election with Clinton vs Trump. As things turned out, the European elections proved more benign than feared, the US election delivered one of the most startling results in decades and markets responded favourably through economic policy stimulus. Who would have imagined that?
After all the turmoil, global equity markets commenced a sustained rally that delivered strong double digit gains for the year as a whole. Other risk (equity) assets, such as high yield bonds, also performed very well. However, government bond markets had a poor year and bond-sensitive equities, such as AREIT’s [Australian Listed Property], underperformed with negative returns. In general these developments were driven by investors chasing the “reflation trade” – that is, a view that the world economy was finally entering a period of better growth with moderate inflation.

As 2017/18 starts, risk assets are looking less attractive than a year ago and markets are facing up to the end of the global interest rate easing cycle. From here on, interest rates go up rather than down, with implications for all asset classes, but most especially bonds and currencies. At the same time, the pace of global growth looks set to slow down, thereby providing less support for profits and cash flows. Given all this, equity markets sitting on high valuations look vulnerable to many analysts.

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Economic Snapshot – Annual 2016 & Beyond

Economic Snapshot – Annual 2016 & Beyond

This economic snapshot  covers 2016 with some perspective on how markets performed and why, with an outlook for the year ahead.

In summary

2016 was a dramatic year for the world’s financial markets. The year started with collapsing oil prices, fears of recession and deflation, equity markets falling sharply and investors favouring bonds and what might be termed “expensive defensives”.

By the end of the year, we had rising oil prices, renewed optimism about US growth and inflation, cyclical equities rallying, bonds selling off and defensives falling out of favour. In between we had on then off again OPEC deals, we had Brexit and we had the USA Trump victory which threw most fund managers. In summary despite all the noise and surprise political outcomes, we had a good year for diversified portfolios with positive returns recorded by a number of asset classes in 2016. This end result rewarded patient investors and masked the considerable within-year volatility.

2017 looks like being another year of volatility (the new normal) although somewhat surprisingly, forward looking expectations for asset classes have more upside room than at the beginning of 2016. This is an encouraging scenario built on economic rationale not geo political activities and market sentiment which, of course has a history of overturning expected outcomes in the short term. Snapshot comments cautiously on the outlook in the second half of this update given the interest of many readers for asset class outlooks.

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Economic Snapshot – September-October 2016

Economic Snapshot – September-October 2016

In summary

September was a frustrating month for investors in global financial markets. The first half of the month saw both bonds and equities retreat on concerns the Federal Reserve would lift interest rates at its meeting on the 20th – 21st. As things turned out, the Reserve left the cash rate unchanged and revised down its forward profile of interest rates. The markets were reassured by this, leading bonds and equities to recover ground lost earlier in the month. This see -saw effect is now a recurring theme as markets dance to the tune of the interest rate outlook.

Here in Australia the Reserve Bank has maintained the cash rate at 1.5%, noting the economy is growing at a moderate pace but inflation is low and likely to remain so for some time. Once again, the Reserve Bank noted that an appreciating A$ could complicate the adjustments the economy needs to make.
The Bank of Japan announced a new dimension to its QE program aimed at generating a positive yield curve. Despite the commentary it appears markets remain sceptical about this move.
Meanwhile in Europe the European Central Bank [ECB] left its monetary policy stance unchanged at its meeting in early September. Financial markets interpreted the accompanying statement as a signal the ECB would start to wind back its QE programme. This contributed to nervousness and volatility, as did speculation about the solvency of Deutsche Bank later in the month.

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Economic Snapshot – August – September 2016

Economic Snapshot – August – September 2016

In summary

Financial markets were quieter in August than in previous months as Northern Hemisphere holidays reduced the volume of trading activity. Key economic data around the world did little to change the overall picture the markets have come to understand and expect. That is, the US economy continues to improve, but without sufficient strength to make a clear case for imminent interest rate increases. The government stimulus program in China is still showing up in some better than expected activity numbers, but this is not expected to last into 2017. In Australia, economic growth is holding up fairly well, led by the housing sector, while business investment and inflation remained muted. The UK economy is starting to show signs of the adverse impact of the Brexit vote, which led the Bank of England to ease monetary policy further in August. The Reserve Bank of Australia has been content to leave the cash rate at 1.5%. The US Federal Reserve has been try to soften the markets up for the possibility of higher-than-expected interest rates, but the mixed economic data have been undercutting their efforts.

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Economic Snapshot – July 2016

Economic Snapshot – July 2016

In Summary – a look at July 2016

The turbulence world financial markets unleashed by the surprise Brexit vote at the end of June quickly disappeared in July as it became apparent that any immediate negative impact would more than likelybe restricted to the UK. The issue of sorting out the actual exit has also been realised as a long term
programme meaning there’s no need to overreact.

What markets did do, is turn their attention back to the pace of economic growth and its implications for central bank policy. In general, the latest data show no signs of imminent recession in major key economies like the US and China. Equally there’s not enough US growth to clearly compel the Federal Reserve to lift interest rates in a hurry. Combined with expectations of further monetary stimulus in the UK, Europe and Japan, the markets were happy to resume buying both equities and government bonds.

After holding the cash rate steady in June, the Reserve Bank cut to a new record low of 1.5% on August 3rd. This came in the wake of the inflation report for the second quarter which, as expected, showedinflation remaining below the bottom of the Reserve Bank’s target range.

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