Economic Snapshot – 2015 in Review

Economic Snapshot – 2015 in Review

What happened, Why & the Outlook for 2016

The start of share markets in 2015 replicated the start of 2014 with strong gains in the first quarter which drifted away through volatile movements over the remaining 8 months. Media focussed on a bad year for markets and investors but despite this returns in many diversified portfolios still managed to outperform cash and term deposits illustrating the benefits of long term investing and diversification.

Historically January tends to be a good month as we start a new year with investments, but 2016 has started differently with losses allegedly linked to the Chinese market and the incessant media commentary on China’s economic slowdown however the discipline of looking at economic fundamentals is the only long term way to invest with confidence and as at January 2016 the fundamentals are pretty good.
Although economic reports often focussed on the USA increasing rates and exiting the Quantitive Easing [QE] programme, the things that really changed 2015’s outlook turned out to be developments in the emerging markets, [notably OPEC and China] coupled with the fall in the price of oil which was a major shock to the global economy. This spearheaded the collapse of the Chinese equity market [from record highs] and then the depreciation of the Yuan provoked fears of spreading recession. These events introduced significant volatility.

Interestingly, the Australian economy actually had a better year than envisaged at the end of 2014. Business conditions improved, as did the labour market and arguably the change in Prime Minister helped improve the national mood. The expected depreciation of the A$ also contributed to stronger business conditions and noticeably helped international investments in portfolios. Nevertheless, the transition of growth outside and away from the resources sector remained slow and prospects of a budget surplus have been pushed out even further. From the perspective of overall wealth creation, the housing market performed very strongly in 2015, leading to the introduction of macro-prudential measures to cool speculative activity.

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Economic Snapshot – November 2015

Economic Snapshot – November 2015

November was cluttered with mixed messages from mainstream media on global financial markets. Markets appear to have ongoing concern about rising US interest rate increases and weak commodity prices have undermined both bonds and equities through November into early December. An unusually clear message from the Federal Reserve about the likelihood of a rate rise in December and the economy’s ability to handle it sparked a recovery in risk assets in the second half of the month but it then fell away on exactly the same premise. This tells investors to focus on fundamentals not fear. The fundamentals are that the economies of the world are likely to do better over the next few years not worse.
Key economic data in Australia, the US and Europe all suggest scope for modest improvement in economic activity in coming months. However, the manufacturing sector in China continues to slow down as the service sector improves. Again this is nothing new for investment strategists.

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Economic Snapshot – Sept-Oct 2015

Economic Snapshot – Sept-Oct 2015

September – October 2015 In summary
September was another difficult month for the global financial markets as calendar year 2015 reflects an eerie resemblance to 2014 with a strong first quarter, falling away towards the latter part of the year. A combination of concerns about a slowing world economy (connected to China) and uncertainty
about what the US Federal Reserve will do with interest rates drove a general sell-off in risk assets. These two issues appear to be dominating sentiment. However in pragmatic terms, economists continue to argue that the macro environment of the world’s economies is relatively healthy – But in terms of sentiment, markets are extremely sensitive to perceived bad news and they are not linked to economic output.
Financial markets were already nervous after August’s very poor performance and although data in September showing further improvement in the US household sector, other figures showing a slower pace of employment growth and manufacturing activity con tributed to underlying concern about the
US economy heading towards recession. Soft data about the Chinese manufacturing sector added to these fears even though there was more positive news from other parts of the economy.
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Economic Snapshot – Aug-Sept 2015

Economic Snapshot – Aug-Sept 2015

August was the worst month for global financial markets in several years as sentiment was hit by a conjunction of factors which the markets collectively interpreted as a global deflationary shock. The events included the re-emergence of a decline in the price of oil and other commodities, a surprise currency move coupled with soft economic statistics from China and, finally the ongoing nervousness about when the Federal Reserve will lift interest rates in the USA.

The latter is not new news. What this means is the USA is strengthening, China is weakening and commodities are falling. In the scheme of things there is no economic reason for global market falls but nervousness and irrationality
drives short term behaviour. Portfolios in professional hands are no doubt seeking better value today. Overall equity markets have fallen across the board, especially among the emerging markets, and volatility has spiked sharply higher. The extreme volatility and dramatic reactions to economic news suggest the markets are pricing more off fear than off fundamentals. Economic data from the US released in August confirmed ongoing modest economic recovery with low inflation.

The Australian economy recorded modestly positive real GDP growth in the second quarter driven by consumer spending. The Reserve Bank left the cash rate unchanged at 2% at its Board Meeting on 2 September.

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Economic Snapshot – Jul-Aug 2015

Economic Snapshot – Jul-Aug 2015

With the ending of the financial year in June in Australia, July proved to be a turbulent month for the world’s financial markets. We witnessed the resolution (for now) of the Greek crisis which settled nerves but no sooner had this happened we experienced significant volatility in the Chinese equity
market which had/has a contagion effect on Australian shares. After flirting with departure from the Eurozone, the Greek Prime Minister suddenly capitulated to the demand of the country’s creditors in a deal that was harsher than he was rejecting a few days before. Greece will now get the financial support it needs, but at a cost as the political landscape has been changed and new elections are likely before the end of the year as voters feel duped by the new government.

The dramatic falls in Chinese equities raised concerns about the country’s economic health, but in reality the stock market has little connection with the economy. Likewise Chinese shares doubled in the corresponding period over the space of a slightly more than a year. Of greater importance is the continued improvement of the US economy and the Federal Reserve’s much publicized signal that it is likely to lift interest rates this year. Markets remain jittery on how this will play out.

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