Take a look at the bigger picture:
Global markets are shifting constantly with volatility becoming the norm. Understanding what’s happening and how these events can impact you will help you to make confident decisions about your financial future.We have featured a range of information to help you navigate your way.
Please download the full reports created by Dr. Shane Oliver, AMP Capital’s Head of Investment Strategy and Chief Economist. He is also a regular media commentator on major economic and investment market issues.
19 December 2013
- After much talk since May, the US Federal Reserve is finally reducing (or tapering) its asset purchase program – by $US10bn a month.
- However, the Fed has enhanced its very dovish forward guidance, highlighting that interest rate hikes are still a long way off and dependent on the economy.
- Fed policy remains market friendly & generally supportive of further gains in shares.
- While, Fed tapering and speculation around it has and will contribute to bouts of market uncertainty, it should be seen as good news as it indicates the US recovery is becoming more sustainable.
11 December 2013
- 2013 has turned out to be another good year for investors as various threats faded and the global economy remained in a cyclical “sweet spot” of improving growth, low inflation and low interest rates. This resulted in solid overall returns.
- 2014 is likely to see improving growth globally and in Australia and with inflation and interest rates remaining low this should provide a positive backdrop for growth assets even as bond yields gradually continue to drift higher. However, with shares no longer dirt cheap and dependent on rising earnings, volatility is likely to be a bit higher and returns a bit more constrained.
- The main risk to keep an eye on is a sharp sell in bond yields perhaps on Fed tapering or much stronger growth.
- September quarter GDP growth remained sub-par at 0.6% quarter on quarter or 2.3% year on year.
- The combination of a housing recovery, gradually improving confidence and a pick-up in non-mining investment point to growth picking to up 3% through 2014.
- This should help underpin stronger profits for the Australian share market, which in turn should support further share market gains, albeit at a more constrained pace than over the last year with a bit more volatility.
- Low/falling inflation suggests that right now deflation is maybe more of a risk than rising inflation in developed countries. Falling inflation reflects significant spare capacity globally and soft commodity prices.
- Inflation is likely to stop falling next year as global growth picks up, but a significant rise in inflation looks a way off.
- This means low interest rates will be with us for quite a while which is a positive for growth assets.
- A good starting point when thinking about investment markets is the concept that they are “efficient” as espoused by Eugene Fama.
- But as Robert Shiller and others have shown, the efficient market hypothesis often does not apply in reality as shares are more volatile than can be justified and tend to move in mean reverting cycles.
- Combining the work of Fama and Shiller suggests that there is a strong case to invest in indexed funds in highly analysed share markets, eg, US shares, but importantly there is also a strong case for dynamic asset allocation.
- Helped in part by a search for yield various asset classes have rallied strongly, but it is doubtful that the rally so far has gone too far. Valuations remain reasonable, credit growth is not excessive and interest rates are likely to remain low for some time.
- A range of assets continue to provide attractive yields relative to low cash and term deposit rates.
- There is a case for those who can take on a bit more risk to consider a higher exposure to parts of the share market that have underperformed and yet will benefit as global and Australian growth picks up.
- Chinese growth seems to be stabilising around 7.5%.
- Chinese debt levels have risen rapidly, but from a low base and the authorities are trying to slow it down.
- While the Communiqué of the much anticipated 3rd Plenum was vague as usual from such events it is clear China is heading towards more reforms to increase the role of market forces as a means to unleash growth rather than more fiscal and monetary stimulus which runs the risk of being unsustainable.
- Chinese shares remain cheap pointing to the prospect of good medium term returns.
- Retail sales growth has been poor for four years now reflecting a combination of consumer caution, falling wealth, “excessive” interest rates, the strongly rising $A, surging electricity prices, slowing income growth and job insecurity.
- With some of these factors now fading or set to fade, retail sales growth is likely to pick-up a notch next year. This should see growth pick up to around 4 to 5% pa from 2-3% over the past four years.
- This would be good news for the Australian economy as it would signal a broadening in the recovery in non-mining sector growth from just the housing sector.
- While it would add to confidence that we have seen the low for interest rates, for investors it will help underpin the share market via higher profits and support other growth oriented investments.
- US Congress has agreed to end the partial government shutdown and raise the debt ceiling.
- While the short term funding and debt ceiling increase potentially means another showdown early next year it may not be as problematic given the pressure the Republicans are now under.
- The removal of a threat to global growth with the ending of the shutdown and increase in the debt ceiling adds to confidence that the global economic recovery will continue and is a positive for growth assets including shares.
- The partial US Government shutdown is likely to continue until there is a joint solution to the shutdown and approaching debt ceiling later this month.
- The debt ceiling poses the greater risk to the US (and global) economy given the risk of debt default by the US.
- However, the most likely outcome is a last minute increase in the debt ceiling. And in any event a debt default is unlikely.
- Shares are vulnerable in the short term as uncertainty intensifies, but are likely to rally solidly into year-end once a solution to the debt ceiling is in place.
- Australian unlisted commercial property returns have been strong at around 9.5% pa over the last three years.
- Expect soft space demand against the back drop of a sluggish economy and rising space supply to see returns slow to around 7.5% over the year ahead.
- However, the attractive yields on offer from unlisted commercial property relative to other assets are likely to ensure that investor demand remains solid, plus with an improvement next year in Australian economic growth will likely drive an uptick in returns from 2014-15.
- The Fed’s decision not to taper reflects a desire to see stronger US economic growth and guard against uncertainties around coming US budget discussions.
- The Fed clearly remains very supportive of growth and this will help growth assets like shares, albeit there may still be a speed bump in the month ahead.
- The policies of the new Government if implemented are likely to lead to smaller government, less regulation and over time improved productivity and economic growth.
- Expect a mini-budget around November that may contain more aggressive budget savings.
- The historical experience combined with the more business friendly approach of the Coalition suggests a positive share market response over time.
- The key uncertainty relates to the new Senate.
- June half profit reports were poor consistent with sluggish June quarter GDP growth of 0.6% or 2.6% year on year.
- On a 12 month horizon however, a reduced cost base, low interest rates and a lower $A point to stronger economic growth and profits.
- The share market has moved up ahead of profits and while gains are likely to slow, they are likely to remain decent on a 12 month view as profits start to improve.
- The rout in emerging market currencies and assets is indicative of a turn in the long-term secular cycle away from them. While an Asian crisis re-run is unlikely, the rout could have further to go and the risks have risen.
- Countries with current account deficits such as Brazil, India and Indonesia are particularly vulnerable. Surplus countries like Korea and China are better placed.
- For investors this means being cautious regarding emerging market assets for now. It also adds to the vulnerability of the $A