Market Update July 2019
As we begin a new financial year, it is timely to again revisit where the markets are at and think about what we can expect in the period ahead.
The sharemarkets around the world have recovered from the December lows in remarkable fashion. From a situation that looked very gloomy, the majority of losses have been recovered and we are now back at a position we were at previously. Share prices are high and we are lacking a compelling reason for them to continue to rise at the historical rate. Indeed there is an air of fragility and some bad economic news, or a Central Bank negative comment or a tweet (you knew that was coming!) can lead to sharp falls.
Here are the key points as I see them now;
What has happened?
Sharemarkets have recovered most of the losses from late 2018. This means that the returns for the 2019 financial year which at one point were looking negative have now turned positive. The degree of the positive return depends on how much exposure you have to growth assets – shares and property.
More recently in May, we saw markets overseas fall as the Trade War escalated. Australia which usually follows the lead from the US went out of sync due to 3 reasons;
The Election result brought a sense of relief that saw shares rise. Keep in mind that this was merely a relief rally and the Government will need to deliver results for sharemarket investors to gain greater confidence.
The Bank regulator, APRA, relaxed some of the lending requirements, which had a similar impact to a rate cut, and
The RBA has now delivered two rate cuts.
June saw markets finish the financial year in positive fashion.
The fear of interest rate increases that previously gripped markets has now completely reversed. It’s now a matter of how many cuts, how far they go and what other measures will be applied when interest rates get closer to zero or even below zero. Yes, that is correct – below zero. The Swiss National Bank, the equivalent of our Reserve Bank first reduced rates below zero in 2009. Currently, their headline rate is -0.75%.
This year we can expect further rate cuts or other stimulus from the US Federal Reserve, the European Central Bank and more from Australia. So with inflation still low, this will give a good degree of confidence that global economic growth will improve and this should support sharemarkets.
Indeed this month the RBA reduced rates again, this time to just 1%. Whilst those with a mortgage will be pleased, those with money in Term Deposits, Bank accounts and some defensive assets will be disappointed.
The plan/hope is that with interest rates so low, we the consumer will spend more and this will stimulate economic growth, so more people will be employed who will spend more and so on until we are all spending too much and inflation becomes a concern and the RBA will raise interest rates so we spend less and then …
However, interest rate changes alone are not enough and there is a lag before any impact is evident. This view was supported by the head of our Reserve Bank, who implored the Government to take action to further stimulate the economy and drive economic growth.
Following on from the above comment about interest rates changes, an additional attempt to stimulate the economy via Tax cuts was recently passed by Parliament. Again these are designed at putting more in the pockets of taxpayers and for this to give us more confidence to increase our spending and adding to employment.
I’m relieved that I didn’t make any recommendations based on a possible Labour victory as some advisers and brokers did by telling clients to sell shares that would have been impacted by the franking credit changes. Sometimes advice is about the things you don’t do rather than what you do.
Whilst in May and June there were strong comments coming from the US and China about Trade relations, the recent G20 (see further notes below) meeting saw positive remarks and good intentions gain prominence.
It appears that the US and China are on better terms. It’s hard to imagine that either side wants to risk a full-scale trade war, but similarly, neither wants to be seen to be caving in. Financial markets are not expecting a deal, but are also not expecting a full-scale trade war.
Trump has an election next year, so logically he will want a resolution by then (if it is good for the US). He will also want a strong economy and sharemarket which will both help boost his re-election chances.
Conclusion and what does it mean for investments?
The last year to June 30th has seen the roller coaster that comes with investing in growth assets display extreme levels. With sharemarket valuations peaking and interest rates at extremely low levels, it won't take much to see markets move dramatically either up or down.
It could go either way at some point. Some expect economies to flounder and see a recession, whilst others see the opposite; inflation rebounding in response to the stimulus and a revisiting of the panic like we saw in late 2018. Either is not good for financial markets and investments.
Whilst it is easy to get caught up in the daily headlines, the reality is that these periods do pass and trying to react and timing entry and exit points remain impossible to do with any degree of consistency.
As I have said before, we need to manage what we can control. All of the above causes of market movements are beyond our control. Your own personal risk tolerance and risk capacity need to be revisited and then if appropriate, asset allocations need to be adjusted.
Measuring how long your capital is expected to last is also a key tool that I will continue to use to help guide decision making and planning.
As always feel free to contact me if you would like to discuss this further.
G20 Further notes
The G20 was formed in 1999 and is an international forum for the governments and central bank governors from the 19 countries with the largest and fastest-growing economies plus the European Union. Australia is one of the 19. Its members account for 85% of the world's GDP, and two-thirds of its population. The group has no permanent staff, so every year in December, a G20 country from a rotating region takes on the presidency. Shinzo Abe from Japan is hosting the event in Osaka.
The world leaders get together to discuss the most important financial and economic issues of the day. Members then try to make sure that their plans are co-ordinated.