Tag Archives: Economic Update

Market Insight – Staying the Course

By visual /May 13,2020/

While it can be hard to stay in the market when share prices plummet, now is not the time to panic.

The COVID-19 (coronavirus) pandemic has triggered a share market crash, in Australia and internationally. Since 31 December 2019, when the first cases of the new virus were reported in China’s Hubei province, the disease has spread rapidly to Europe, UK, North America, Asia, the Middle East and Australia.

We’re now seeing extraordinary disruption to economies and societies, at home and abroad, and the effect on share markets has been substantial. They’ve suffered major falls across all regions, as supply chains are disrupted and business activity is restricted.

It’s possible they’ll remain low or fall further as the shutdown measures put a squeeze on companies’ turnover and profits and damage consumer confidence. The Australian dollar has also fallen significantly against the benchmark US dollar.

At times like these, it can be easy to make knee-jerk decisions, but rash short-term thinking can often be counter-productive.

Fear-driven decision making

Seeing the value of your investments go down is never a pleasant feeling. Given the fear and uncertainty COVID-19 has caused in the community, many investors may feel panicked about the state of their portfolio.

Cutting your losses and moving your holdings into cash may seem a tempting option at this time. The emotion is understandable but allowing it to drive your decision making may not serve you well in the longer term.

Different assets classes produce different returns, at different times in the market cycle. A diversified investment strategy is often the surest way to grow the value of your portfolio over the long term.

You can also further diversify across fund managers and investment styles, so your portfolio is less vulnerable to a falling market. Different investment styles always perform differently throughout the investment cycle.

Moving your money into cash now, when the share market is so volatile, may only crystallise any losses and could leave you with insufficient funds to meet your long-term financial goals, such as having enough to retire on. And being out of the market may mean that you miss out when the market starts to recover again. Timing the market is almost impossible.

Legendary investor Warren Buffett is well known for his investment philosophy and strategy of holding the course when markets fall – and he’s one of the world’s most successful investors. One of his famous quotes is “our favourite holding period is forever”.

Dramatically changing course

While COVID-19 represents new territory for investors and businesses, chances are the market will stabilise in the medium to long term, that is, over the next three to five years. History has shown time and again that share markets have the ability to recover from significant market events and be a source of returns in the long term.

Reminding yourself of your long-term goals can be a good way to counter any sense of panic the current situation may have generated around your personal finances and investments.

Going it alone

Now isn’t the time to go it alone. We’re available to talk through any concerns you may have, as you navigate the continuing uncertainty the next few months have in store for all of us, financially and personally.

Financial advice is critical in uncertain economic times.

Source: IOOF

Economic Update

By Robert Wright /February 19,2019/

Market and Economic overview

Australia

• Economic data continues to paint a mixed picture of the domestic economy. The manufacturing PMI survey – a useful gauge of activity levels in the sector – came in below the 50 level; indicating challenging conditions.
• Job advertisements have also been weak and are running -3.7% below the corresponding period a year ago.
• A closely-watched consumer confidence reading also deteriorated sharply in January. The confidence data does not augur well for discretionary spending, which the Reserve Bank of Australia (RBA) is relying on to help inflation return towards the midpoint of its target range.
• For now, inflation remains below target, coming in at an annual rate of 1.8% in the December quarter.
• Over the long-term, the RBA continues to suggest that Australian inflation will return to the target band of between 2.0% and 3.0%.

United States

• The most important market developments occurred towards the end of the month, when the Federal Reserve signalled that US monetary policy is unlikely to be amended in the first half of 2019, at least.
• Commentary from Federal Reserve Board members suggested they may be willing to be patient in determining whether further interest rate hikes are appropriate.
• The focus on the Federal Reserve diverted attention from economic data that was released. More than 300,000 jobs were created in the US in December and there was further evidence that labour market tightening is resulting in wage pressure. Average earnings growth quickened to an annual pace of 3.2%.

Europe

• Growth in the Eurozone economy moderated in the December quarter, declining to an annual rate of 1.2%. This was the slowest pace of growth for five years.
• In spite of the challenging economic conditions, the employment picture has not deteriorated. The unemployment rate remained unchanged at 7.9%; the lowest level since the GFC.
• In the UK, the Brexit debacle descended into further chaos as Members of Parliament rejected Theresa May’s Brexit latest withdrawal proposal. Confidence in the leadership remains fragile, however and lawmakers remain divided over key elements of the UK’s proposed withdrawal from the European Union.

 

New Zealand

• At 1.9% yoy, the pace of inflation was unchanged in the December quarter. For now, there appears to be limited chance of the RBNZ amending policy settings – interest rates remain at 1.75%, where they have been since late 2016.
• Credit and debit card spending plunged in December, adding to concerns that the economy might be cooling.
• Business confidence remains subdued, though has rebounded somewhat from the very low levels seen in the middle of 2018.

Asia

• Chinese authorities injected more than 1 trillion yuan (around A$230 billion) into the financial system ahead of the Chinese New Year holidays. This followed a stream of subdued economic data.
• Chinese exporters continue to be affected trade tariffs – the value of exports in December declined 4.4% from a year earlier.
• Imports were lower too, suggesting consumer demand is tailing off and unable to offset the impact of lower export demand.
• In Japan, inflation eased to a 14-month low of 0.3% yoy; perilously close to moving into negative territory. This is in spite of ongoing stimulus from the Bank of Japan.

 

Australian dollar

In early January, the Australian dollar fell below the US$0.70 threshold for the first time since early 2016. The currency then made quite a sharp recovery, closing the month at US$0.729 – an appreciation of 3.6% in January as a whole. The ‘Aussie’ strengthened towards the end of January in particular, following comments from the Federal Reserve that took the wind out of the US dollar’s sails.

Commodities

Commodity prices finished mostly higher in January, led by iron ore (+17.4%) and oil (Brent +11.6%). Easing US/China trade tensions supported commodity prices generally, while iron ore prices rose sharply towards the end of the month following a tailings dam collapse at Vale’s Feijao mine in Brazil. Oil prices rose on improved demand prospects, as US/China trade talks appeared to progress well, and as OPEC continued to sideline supply. Gold (+2.0%) rallied after Federal Reserve policy guidance pushed back timing expectations of the next US interest rate rise. Industrial metals reversed recent losses, with zinc (+14.3%), lead (+9.3%), copper (+7.5%) and aluminium (+4.1%) all seeing gains.

Australian equities

Following the slump in the fourth quarter of 2018, the Australian equity market started the year off with renewed optimism as the S&P/ASX 100 Accumulation Index climbed +3.7% higher. Resurgent global markets, rising commodity prices, solid local employment data and a growing belief that domestic interest rates will stay lower for longer helped ‘risk assets’, such as equities, rally over January. The Energy sector (+11.2%) provided the best return, benefiting from a recovery in oil prices after the near 40% drop in the fourth quarter of 2018.

The 20% climb in oil prices through January helped all constituents to provide positive returns, with WorleyParsons (+21.5%) and Caltex Australia (+5.3%) at the extremes. The Financials sector (-0.2%) not only provided the lowest return, but was the only sector to decline over the month. Small cap stocks outperformed their large cap counterparts, evidenced by the +5.6% rally in the S&P/ASX Small Ordinaries Accumulation Index.

 

Listed property

The S&P/ASX 200 A-REIT Index returned 6.2% in January. Industrial A-REITs (+9.7%) was the best performing sub-sector, followed by Office A-REITs (+8.0%). Retail A-REITs was the weakest performing sector in January (+2.8%). Major offshore property markets also delivered strong returns, bouncing back from disappointing performance in December. The FTSE EPRA/NAREIT Developed Index returned 10.9% in USD terms and 10.5% in AUD terms, well ahead of broader equity markets. In local currency terms, Hong Kong (+13.3%) was the best performing market, while New Zealand (+4.0%) lagged

Global equities

Global equity markets bounced back solidly in January after a dismal end to 2018, driven by resurgent emerging markets and the US S&P 500 delivering its strongest January return since 1987. The appreciation of the Australian dollar (AUD) over the month dulled returns a little, but the MSCI World Index nonetheless finished up 4.1% in Australian dollar terms.

The S&P 500 rallied just over 8.0% in USD terms on a combination of broadly pleasing earnings results, ongoing progress towards a US/China trade resolution and increasingly dovish commentary from the Federal Reserve. The FTSE 100 in the UK struggled under the continued Brexit debacle, but still returned a respectable 3.6% in sterling terms. Emerging markets brought up their third month of positive returns in style, with the MSCI Emerging Markets Index rallying 5.0% in AUD and outperforming developed markets for the third successive month as well.

MSCI Latin America was again the strongest region, up 11.0% in AUD, whereas MSCI Asia was the weakest, but still up 3.6% even though MSCI India just fell short of a positive result, down -0.1% in Indian rupee. The Brazilian stock market powered the Latin America results, hitting a string of record highs and the MSCI Brazil Index finished the month up 10.7% in local currency terms.

Global and Australian Fixed Interest

Treasury yields drifted lower as investors digested the change in commentary from the Federal Reserve and readjusted their interest rate outlooks for the remainder of 2019 and beyond. Ten-year Treasury yields closed January 5 bps lower, at 2.63%.

The somewhat gloomy economic picture and an expectation that US interest rates are likely to be unchanged for the foreseeable future saw yields in other major bond markets follow Treasury yields lower. Yields declined 9 bps and 6 bps in Germany and the UK respectively, for example, though were almost unchanged at 0.00% in Japan.

Australian government bond yields followed the lead of other major markets and declined during January. The 10-year yield closed the month 8 bps lower, at 2.24%, dragged lower by the subdued inflation reading for the December quarter.

Global credit

Global credit markets were supported by the more optimistic outlook for equity markets, as well as expectations that US interest rates might not be increased as aggressively as previously anticipated.

The yield on the Bloomberg Barclays Global Aggregate Corporate Index fell 19 bps, to 1.36%. The improved sentiment was reflected even more clearly in the high yield sector – the Bank of America Merrill Lynch Global High Yield Index (BB-B) spread narrowed 93 bps, to 3.66% – close to its level from the end of November prior to the December blow-out.

There was a reasonable amount of new supply – less than January 2018, but nonetheless a significant increase from the closing months of last year – and pleasingly there appeared to be no signs of indigestion. New offerings were generally met with reasonable demand and tended to fare well in the secondary market.

 

Source: Colonial First State.

Royal Commission into Financial Services. Our advice and you.

By Robert Wright /February 13,2019/

The final report from the much-anticipated Royal Commission into Misconduct in the  Banking, Superannuation and Financial Services industry was released on 4 February.  Whilst there has been plenty of media coverage regarding the report already, the attached newsletter (Royal Commission – our advice and you) is designed to provide:

1. A brief summary of the key areas relating to the provision of Financial Advice, and
2. How it affects the advice and services I provide to you.

In short, the way I provide advice and services will remain unchanged.  The primary reason we partnered with Capstone when we established BMB Private Wealth was because they enabled me to put my clients at the forefront of everything I do.  The advice I give is tailored to your needs, not the requirements or demands of a bank or big institution.

I look forward to continuing that advice and service, and welcome any changes the Royal Commission may apply.

What’s next for Brexit?

By Robert Wright /November 16,2018/

A ‘black swan’ refers to an event or occurrence that deviates beyond what is normally expected of a situation and is extremely difficult to predict.

Brexit arguably is a ‘black swan’ that, paradoxically, has taken years to unfold. Despite this, we still do not know what the effects of Brexit will be.

We know the basic facts: on 23 June 2016, the UK held a referendum on leaving the EU, in which a majority of British voters voted yes.

On 29 March 2017, the UK government invoked Article 50 of the Treaty on European Union, commencing the legal and political process whereby a member state of the EU ceases to be a member.

On 20 June 2018, the UK Parliament passed The European Union (Withdrawal) Act 2018, which became law by Royal Assent on 26 June 2018. This Act declares “exit day” to be 29 March 2019, at 11pm Greenwich Mean Time, or midnight, Central European Time.

There is a great deal that we do not know

Negotiations between Britain and the EU are ongoing, and there is still uncertainty as to the ‘deal’ they will strike. The next formal European Council summit, due to be held on 18 October 2018, had previously been viewed as the deadline for striking a deal, but talks may continue beyond this date.

Commentators have suggested that the outcome of these negotiations may fall into one of the following broad categories:

Hard Brexit:

The UK leaves the EU in every sense, giving up full access to the single market and customs union, as well as all EU rules and regulations, financial commitments to the EU and the jurisdiction of the European Court of Justice (ECJ). Hard Brexit would see Britain gain full control over its borders, the laws that apply within its territory, and the responsibility for making its own trade deals with other countries – and with the EU – under the World Trade Organisation (WTO) rules for trade.

Soft Brexit:

This approach would try to leave the UK’s relationship with the EU as close as possible to the existing arrangement, particularly so as to retain unfettered access to the European single market and customs union.  But since the UK would not be a member of the EU, it would not have a seat on the European Council, nor would it be represented in the European Commission.

No deal:

A hard Brexit without the arrangements being pre-agreed between the UK and the EU.

In the light of the above, anything seems possible, even a fresh referendum or a snap general election, which could change everything.

The politics of Brexit remains fraught

After the government issued a statement in July, which included a number of concessions aimed at reviving negotiations with the EU, politics remains fraught within the Conservative Party among those who are in favour of a Soft Brexit and those who are not.

Examples of a Soft Brexit include Norway, Iceland and Liechtenstein, which are not members of the EU but are part of the European Economic Area (EEA). In return, they must make payments into EU budgets (which sets out the EU’s long-term spending priorities and limits), accept the EU’s “four freedoms” of movement of goods, services, capital and people, and be subject to EU law through the European Free Trade Association (EFTA) Court.

A Soft Brexit could be applied in the same way to the UK, but the UK government is likely to insist on tighter controls for immigration into the UK.

Brexit is debated not only among political parties, but also among other organisations. These include, on the one hand, Leave Means Leave, the Bruges Group, and the European Research Group, and the Open Britain group, Best for Britain, Britain for Europe, InFacts, and the People’s Vote campaign, on the other.

The initial effect of the Brexit vote, which caused panic on the stock markets, is now in the past. The British pound was impacted by the Brexit vote, falling by 13.3% on the day the result came out, from US$1.50 to a 31-year low of US$1.3012. The pound fell as low as US$1.15 in October 2016, which the Financial Times called a 168-year-low in terms of a trade-weighted index measuring sterling against a basket of its trading peers and is now trading at US$1.28.

However, just as no-one can predict the final outcome of the Brexit negotiations, no-one could possibly state categorically that all potential final deals and arrangements are factored into stock market prices. Brexit is very much a black swan still.

 

Source: BT