Financial markets have experienced a solid run in the last six to 12 months, with both higher (i.e. equities) and lower (i.e. fixed income) risk investments all performing relatively well.
Despite the ongoing economic challenges that are mitigating the outlook for growth, the sound performance of both equity and fixed income investments has continued to provide a degree of insulation for investors.
The economic malaise facing many countries remains most prevalent in Europe where the overhang from the debt crisis continues to restrict the growth outlook for the region. Unemployment remains stubbornly high at over 12%, while GDP growth has continued to deteriorate over the last year. This is continuing to restrict both business and consumer confidence, exacerbating the current weak environment. While the European Central bank has been active in providing much needed liquidity and support to the region, further stimulus measures are required and the slow growth environment in Europe is likely to be a drag on global growth through the second half of the year.
Nevertheless, across the Atlantic the US economy continues to make positive strides. Through the aggressive monetary policy stance of the US Federal Reserve, both cash and bond rates have fallen to all time lows. Other than financial markets, the approach taken by the Fed has benefited a number of areas of the US economy, principally housing where home sales and building approvals have steadily improved since late 2012. The flow on impact has been felt across the US economy with jobs growth improving. With inflation remaining benign we expect that the stimulus program will continue in the short to medium term as the US economy recovers further.
In Asia, the rapid growth of the mid 2000’s has certainly declined. The most notable example is in China, where the world’s second largest economy, and Australia’s most important export market, has witnessed a steady decline in GDP growth to its lowest level in over a decade. This has had a direct impact on commodity prices, which have fallen steadily in recent periods, a trend that we expect will continue through 2013 should the growth outlook not improve materially.
After a relatively strong period of economic growth, the Australian economy has now hit a soft patch. The resulting pull back in mining capital expenditure coupled with the decline in commodity prices (through reduced demand from countries such as China) along with the high Australian dollar have together all impeded growth of late. This has resulted in the unemployment rate moving higher (now at 5.5%) through the first quarter of the year.
The general weakness in the economy has seen the RBA cut official cash rates to an all time low of 2.75% with expectations of further cuts should the economy weaken further. The fall in interest rates has provided a fillip to the housing market, which continues to show signs of improvement. With the Federal election only months away, we expect that both businesses and households will remain relatively constrained, particularly as the size of the budget deficit (~$20 billion) will control spending and other government initiatives to support growth.
Overall, while the Australian economy has defied many of the impediments that have hindered other economies, we expect that the economy has passed the ‘high water’ mark for this part of the cycle and is likely to continue to slow further through the second half of 2013.