A year ago there was a long global worry list and high on that list was China. A nearly 50% collapse in Chinese shares, uncertainty about the Renminbi, slowing Chinese growth, fears of a massive oversupply of residential property and uncertainty about the intentions of Chinese policy makers had left many convinced China was heading for the long predicted “hard landing”. But since then it seems China worries have receded. So what happened? Put simply the Chinese economy stabilised. But what’s the outlook for China now? And what does this mean for investors and Australia? Read more
Where are we now?
It’s now a decade since the first problems with US sub-prime mortgages started to appear and nearly eight years since share markets hit their global financial crisis lows. From those lows in 2009 lows US shares are up 239%, global shares are up 167% and Australian shares are up 80% (held back by relatively higher interest rates, the absence of money printing, the plunge in commodity prices from their 2011 highs and the high $A).
An obvious question is how close the next downturn is, which ultimately relates to where we are in the investment cycle.
Rates Remain On Hold
As expected, the Reserve Bank of Australia decided to keep interest rates on hold at 1.5%. But according to Macquarie, we can expect two more cuts this year before economic economic conditions begin to turn around. Watch here.
Rick Maggi
honeymoon over?
Since the US election last November, US and global shares rallied around 8% and Australian shares rallied around 12%. But with Trump now inaugurated as President we are at a point where that optimism is being tested. Read on...
Key Themes for 2017...
Despite a terrible start to the year and a few political surprises along the way, 2016 saw good returns for diversified investors who held their nerve. Balanced super funds had returns around 7.5% which is pretty good given inflation was just 1.5%.
2017 is commencing with far less fear than seen a year ago but there is consternation regarding Donald Trump's policies, political developments in Europe and the growth outlook.
this note provides a summary of key insights on the global investment outlook and key issues around it in simple dot point form.
Top 10 New Year Headlines
What will 2017 hold? Our natural curiosity about the future makes a ready-made market for speculative media articles about events likely to drive financial markets in the coming year.
But the assumption driving much of this seasonal coverage is that the mere turn in the calendar from one year to the next justifies overhauling your investment portfolio, generating significant turnover and unnecessary cost.
Against that background, here are 10 perennial New Year headlines to watch out for in the coming weeks...
1. “New Year, New Portfolio”
This journalistic boilerplate trades off our desire for reinvention as the calendar year turns. The presumption is you should completely change your investment strategy as if you were updating your wardrobe.
2. “Different Times, Different Strategies”
This assumes that the world has changed so dramatically that the rules of diversification and discipline no longer work. If you’re persuaded, look at last year’s forecasts.
3. “Brace for Uncertainty”
Saying the future is uncertain is a bit like saying night follows day. In the past year, there was Brexit and the US presidential election. In the coming year, there are elections in Germany and France. In other words, there is always uncertainty and there is always plenty of scope for speculation.
4. “Interest Rate Fears Mount”
Conjecture about central bank policy is a hardy perennial for financial media looking to fill space. Thee irony is that market expectations about these movements are already incorporated into current prices.
5. “Ten Stocks to Count On”
What if you could whittle your portfolio down to a handful of stocks and get rid of the rest? It might seem like a nice idea. However, it is also a dangerous one as the lack of diversification leaves you open to idiosyncratic influences.
6. “The World has Changed Forever”
Actually, the world is always changing. Economies rise and fall, businesses flourish and perish, some investments do well, while others languish. The rules for dealing with that haven’t changed at all.
7. “The Right Moves to Make Right Now”
This headline assumes there is a perfect time to invest and, equally, a perfect time to cash in. Problem is there’s no evidence you can reliably time the market. And in any case, everyone’s needs are different.
8. “Make Your Portfolio Bulletproof”
The idea that nothing you invest in should be falling in value is certainly an attractive one. The truth is no portfolio is likely to be completely bulletproof. Some parts of the portfolio may outperform, others may lag. Hence the need for diversification.
9. “Invest with the Stars”
No, this isn’t your horoscope for 2017. It’s a headline regularly attached to profiles of the top performing stock pickers of the previous year. But while everyone loves a winner, how many of them repeat?
10.“Take Charge of Your Wealth”
Who doesn’t love do-it-yourself stories? Just buy yourself some trading software and play the currency market from your spare room. Alternatively, you could hire an advisor and get your life back.
The truth about these holiday front covers is they are usually cooked up in an editorial meeting a few weeks out from the holiday season. They’re easy to write. They’re timeless. They’re clickbait. And, best of all, you can recycle them year-to-year.
In any case, what you do with your investments shouldn’t change according to the news, but according to your own needs, goals and risk appetite. Decisions are better made under the guidance of an advisor who understands your circumstances.
That’s a better foundation for a happy new year.
Jim Parker, 'Outside the Flags', Dimensional Australia
The US Fed Hikes Rates
A year ago the Fed raised interest rates for the first time since the GFC began. However, its initial move combined with worries about just about everything to give us a bout of share market weakness into early 2016 before investors realised that there was indeed no reason to fear the Fed after which things got back on track.
Now as widely expected we have just seen the Fed move again – raising its Federal Funds target interest rate from a range of 0.25-0.5% to the range of 0.5-0.75%, begging the question whether we will go through another bout of market ructions. However, this time around the backdrop is very different to a year ago.
This note looks at the key issues.
MARKETS REBOUND
Good afternoon,
Yesterday $34b was wiped off the Australian share market (down 1.9%) and today $58b was put back on (up 3.3%) as investors took heart with President-elect Donald Trump’s conciliatory victory speech. The major winners today were resources, with BHP and Rio jumping by 8.2% and Fortescue 10.2%, buoyed by Trump’s plans to invest in large ‘rebuild America' infrastructure projects (roads, bridges etc.).
But just as yesterday’s slump should have been taken with a grain of salt, the same logic needs to apply to today’s encouraging rebound, and until a clearer picture of Trump’s policies emerge, you should expect continued short-term volatility. However, there is little doubt that Trump’s policies (from what we know so far) will have an inflationary, higher earnings growth bent. And how bonds, property, shares and our currency might react to this new paradigm is hard to gauge at this point.
However at the end of the day markets will work through those uncertainties as they do with all news - all opinions will be accommodated in prices and there is little that any one person can do to change that.
Ultimately, when the news environment is at its hottest, successful long-investors must be at their coolest.
I’ll keep you posted.
Rick Maggi
IT HAPPENED
Today’s US election results were a surprise to most and are likely to have a short-term impact on global share markets. Locally, our markets fell by just under 2% today, erasing gains made over the last two days - yes, after all of the media hysteria today (ie $34 billion ‘wiped off’ the sharemarket etc) markets are merely back to Monday’s levels.
Looking ahead, US markets look as if they might fall by roughly the same percentage this evening as investors weigh the potential pros and cons of a Trump presidency.
As we’ve seen before, these kinds of knee jerk reactions are typically short term in nature, so I would strongly suggest just ignoring the ‘noise’ over the coming weeks, and even consider taking advantage of market weakness, as long as you’re prepared to accept some short-term volatility.
We’ll continue to monitor the situation closely.
Interesting reading...
Bloomberg Rick Maggi
54.2 million worries
We are going through one of those periods where it seems there is a long list of things for investors to worry about: the US election; the Fed; ever present fears about a break of the Eurozone; and China. This article, from Dr Shane Oliver (AMP Capital) discusses some of the very real risks out there and how to manage the noise and worry. Definitely worth reading.
Read more here Rick Maggi
Interest Rates On Hold
Now that the weekend's grand final sporting festivities have come to a close, I'd like to draw your attention to today's rate announcement and the thoughts on why the Reserve Bank of Australia has made this decision.
In making this call, the RBA has resisted temptation to further lower rates, opting instead to wait until the September quarter CPI data is released to allow it more time to measure the impact of the August rate cut.
The US Presidential Election
The attached note looks at the US Presidential and congressional elections that are looming large, especially now that the polls between Donald Trump and Hillary clinton are neck and neck.
$500k Lifetime Limit Scrapped
The Government today announced major changes to the superannuation package contained in the 2016 budget, including scrapping the backdated, lifetime cap of $500,000 on non-concessional contributions (NCCs). However, anyone with over $1.6 million in super will not be allowed to make further NCCs. Today’s announcement includes several other changes.
The full announcement by the Government is attached here.
The announcement does not change the lowering of the concessional contribution to $25,000, and with the reduction in NCCs from $180,000 a year to $100,000, weaker flows into superannuation than in the past can be expected. It’s likely to hit SMSF inflows harder, since these are generally used by wealthier investors who can afford the extra contributions.
Read a full summary of the superannuation package here.
Home values rise 1.1%
The CoreLogic Home Value Index recorded a 1.1% rise in dwelling values in August, with six of the eight capital cities recording a lift in dwelling values over the month. Performance of the combined regional areas remained comparatively soft, with dwelling values virtually flat at -0.1%.
The strong combined capital cities headline result masks the underlying movements associated with dwelling values which are trending differently from region to region and across the broad property types.
In Sydney and Melbourne, dwelling values continued to increase at more than 1% month-on-month, with the cumulative growth (June 2012 to date) now reaching 64% in Sydney and 44% in Melbourne. Outside of Sydney and Melbourne, the third highest rate of capital gain over the same period was Brisbane at 18%, and was as low as 4% for Darwin.
The most recent twelve month period has seen dwelling values rise by a lower 7% per annum, with Perth and Darwin the only capital cities to record a fall in dwelling values over the same period, dealing by 4.2% in both cities. Softer economic conditions and a significant fall in overseas migration rates, together with an increasing net outflow of residents to other states and territories, has made a substantial dent in housing demand, reducing values and rental returns.
Read the full report here.
Interest Rates Steady
The RBA has resolved to keep interest rates on hold at 1.5 per cent ahead of a possible US rate hike on 21 September and the release of Australian CPI figures on 26 October.
As expected, RBA governor Glenn Stevens’ final meeting before handing over the reins to his successor Philip Lowe proved to be uneventful.
The decision to keep rates on hold was in line with market expectations, with the ASX 30 Day Interbank Cash Rate Futures September 2016 contract pricing in a 95 per cent chance of ‘no change’ to the cash rate.
UBS chief economist Scott Haslem said the RBA is likely to remain on hold for the “foreseeable future” given firm growth data, a likely lower trend in the Australian dollar and concern about financial stability.
“While inflation will remain low, core inflation is likely to drift modestly higher from here,” Mr Haslem said.
The ANU Centre for Applied Macroeconomics Analysis (CAMA) Shadow Board attached a 57 per cent probability to 1.5 per cent being the correct policy setting.
“The CAMA RBA Shadow Board clearly believes that the cash rate should not be cut any further,” said the Shadow Board. “After the RBA’s decision in August to cut the cash rate to a historic low of 1.5 per cent, there is good reason to pause.
“Unemployment fell slightly, but only because of a large increase in part-time employment. With consumer price inflation equaling 1 per cent year-on-year, well below the RBA’s 2-3 per cent target band, and wage growth a modest 2.1 per cent year-on-year, there exist little immediate inflationary pressures,” said the Shadow Board.
Rick Maggi
a Trump presidency?
The Great Policy Rotation
For the last two decades, advanced country central banks have been focussed on price stability and have played the first line of defence in stabilising the economic cycle whereas fiscal policy has played back up, focussing more on fairness and efficiency. But we are starting to see debate about whether a new approach is needed. AMP Capital's Dr Shane Oliver discusses what a shift in policy approach (from monetary to fiscal policy) might mean for investors.
Banking On Europe
The European economy has started to recover and is now growing faster than the US. But markets have been fretting about the health of the European banking system and the potential for banking stress to unravel the recovery. Tim argues these concerns are overblown. While profitability is weak, European banks have recapitalised, the European Central Bank is lowering funding costs and governments appear willing to deal with the bad debt issue.
Interest rates cut to 1.5%
Scams: Be Aware
More than 105,000 scams were reported to the Australian Competition and Consumer Commission (ACCC) last year, resulting in losses of more than $84 million. And that's just the tip of the iceberg: many more scams went unreported, often because the victim was too embarrassed to tell authorities about the crime.
To help combat the increasing number of scams, Macquarie Bank have compiled a list of the 12 most common ones they've come across.