Economic Snapshot – Jan-Feb 2016

January was an extremely difficult month for the world’s financial markets with very sharp falls in the price of equities and commodities. Price volatility both within and between days was exceptionally high. These conditions were attributed to the surprisingly large fall in the price of oil, economic data
from China, the US Federal Reserve [Fed] lifting interest rates and concerns about the state of emerging economies. All this led to speculation about an imminent recession and even “the next leg of the GFC” with some extraordinary statements issued from a Bank Of Scotland analyst saying it is “time to sell
everything”.

In reality these comments appear more colourful than constructive, with the economic data revealing nothing to support that much pessimism. The markets continued to selectively misinterpret the data from China, and although the US manufacturing sector showed further signs of slowing, the household
sector remains robust. In Australia, the latest data confirmed recent improvements in the labour market, while inflation remained at the lower end of the Reserve Bank’s target range.

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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

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

September – October 2015 In summary

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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