Market update - Spring 2015

BT Financial Group’s Head of Diversified Portfolio Management, Piers Bolger, looks at what’s happening in investment markets at home and around the world.

The outlook for the global economy remains mixed, with growth through the second half of 2015 likely to be below average. Australian economic growth is also expected to be subdued thanks to slower growth from China. As such financial markets are gyrating around multiple and divergent themes.

Global overview

The June quarter proved challenging and equity and bond markets struggled to deliver positive returns. There continues to be significant challenges for the global economy and financial markets.

The economic slowdown in China is producing volatile equity markets and in August the People’s Bank of China (PBOC) devalued the Chinese Yuan to support the economy, particularly exports. This highlights the fragile nature of China’s growth outlook.

In Europe, the decision by the Greek parliament to meet creditors’ demands enabled the country to receive funding to avoid a collapse of its financial system. But there is still the potential for Greece to exit the European Union at some point. Its debt burden remains perilous and the country is experiencing a massive recession, so long-term challenges remain in place.

The US economy continues to improve, albeit at slightly below trend levels. However, a broader recovery is still taking place, highlighted by solid jobs growth and an improving wage environment. This should mitigate any potential drop in consumer confidence once the US Federal Reserve begins to normalise cash rates.

At home

We believe the domestic economy will continue to moderate further. The medium-term outlook remains challenging and will be linked to global macro events.

The RBA maintained cash rates at 2.0 per cent over the June quarter. The Reserve Bank of Australia’s (RBA) most recent minutes contain scant commentary around the Australian dollar, which may indicate it is comfortable with the value of the currency. While the RBA has not ruled out the possibility of future rate cuts it seems it is going to take a wait and see approach as the economy transitions. We continue to expect the RBA will reduce rates by at least 0.25 per cent in the second half of 2015 given the current domestic outlook.

House prices in both Sydney and Melbourne continue to show good growth compared to the rest of Australia, although recently residential prices have started to stabilise. While the low interest rate environment is supporting higher house prices, we remain concerned about a potential medium term imbalance that could occur, given the current debt levels, should the economic outlook continue to deteriorate.

It’s been a mixed bag for the equity market, with the ASX 200 down 6.6 per cent for the June quarter, although it is up by 1.2 per cent year-to-date, which highlights the volatility challenges facing the market.

The local market continues to be buffeted by weaker data out of China, along with demand/supply imbalances across a number of key commodity markets including iron ore and oil as producers look to maintain high levels of production.

While any further domestic interest rate cuts are likely to provide a positive tailwind across the higher yielding sectors, investors need to remain focused on the quality and sustainability of company fundamentals. In August all eyes were on reporting season. As anticipated, cost and expense management remained core themes, consistent with prior reporting season updates.

Earnings growth is set to be relatively modest at 5 to 6 per cent, which does make it a challenging period for the market to move materially higher in the near term.