Shane Oliver

The past few weeks have been messy with Brexit, the Australian election, another terrorist attack in France and an attempted coup in Turkey. In fact, the last 12 months have been – starting with the latest Greek tantrum and China share market plunge a year ago. It’s almost as if someone has listened to Taylor Swift’s song “Shake It Off” and decided to try and shake up investment markets. This has all seen a rough ride in investment markets with most share markets falling into bear market territory at some point over the last year and bond yields plunging to record lows. This note reviews the worry list from the last 12 months, the impact on returns and looks at the outlook going forward.

This note takes a look at the implications of Australia’s Federal election. The Australian Federal election has delivered a messy result suggesting an even more difficult Senate for the Coalition if it is able to form government and the risk of return to minority government.

Share markets rebounded over the past week as worries about Brexit leading to global financial and economic chaos faded somewhat. Despite noise of ongoing political turmoil in the UK, the British share market surged to its highest for the year helped by the plunging British pound and talk of Bank of England monetary easing. Bond yields continued to decline on lower for longer interest rate expectations but currency markets were a bit more stable (apart from the pound), credit spreads narrowed and commodity prices rose.

Britain votes to Leave the European Union. The past week has been dominated by first the anticipation that Britain would vote to Remain within the EU that saw “risk on” in financial markets and shares rally followed by an abrupt move to “risk off” as the referendum saw the Leave vote win by 52% to 48%.

In a shock for financial markets which had been increasingly confident that Britain would vote to Remain in the European Union, a victory for the Leave outcome by 52% to 48% triggered an abrupt bout of “risk off” in financial markets late last week. I suspect it was probably also a shock to many Brits themselves some of whom seem to be going through a bit of Bregret (thinking they were just delivering a protest vote against the establishment and assumed that Remain would win anyway). Of course, it wasn’t a good week for Europe either. This note tries to put it all in perspective.

Investment markets and key developments over the past week

Recently I was asked where we are in the cycle of investor emotion between the extremes of “euphoria” and “depression”. This is a good question, as knowing where the investment crowd is at and being wary of it is essential to successful investing.

Since the global growth panic in January/February share markets and commodity prices have seen a decent rebound. and the stress in credit markets has receded. This has been helped by a combination of Fed assurances that it will not be reckless and ignore global risks in determining US interest rates, somewhat better economic data in the US and China, more monetary easing in Europe and a rebalancing in the global oil market that has allowed oil prices to stabilise which has helped reduce the risk of default by energy producers. However, the big question is whether it is sustainable or just a bounce. This note looks at the main issues.

This year has seen a growing concern that central banks are out of ammo when it comes to reinvigorating global growth and preventing deflation. And the Reserve Bank of Australia’s latest rate cut has some fearing that it’s going down the same “failed path” as other major central banks. But is it really that bad? Have central banks really failed? Are they really out of ammo?

With the Federal election now confirmed for July 2 it is natural to wonder what the implications for investment markets and the economy might be. At present opinion polls give the Coalition a slight lead over Labor but it’s very close at around 51%/49%. That said according to bets placed on online betting agencies the Coalition is the favourite at around 72% probability of victory, albeit this is down from around 87% earlier this year.

Since the March 2009 Global Financial Crisis (GFC) low in share markets, Australian shares are up 65%, compared to a 145% gain in global shares in local currency terms and a 210% gain in US shares. In fact, both global and US shares reached record highs last year and still remain above pre GFC levels, whereas the Australian share market is around 24% below the record high of 6829 reached in November 2007.

This year’s Budget faced two challenges. ¹ First to serve as the Government’s main economic statement with sufficient sweeteners ahead of a likely July 2 election. Second, to provide more confidence that the budget is on track to a surplus to keep ratings agencies on side after they have recently started to lose patience. It’s arguably achieved a bit of the former via modest individual and small business tax cuts funded in part by a wind back in superannuation concessions for higher income earners but it’s not clear we are any closer to a budget surplus. Superannuation reform is in fact a key aspect of this Budget.

The spike in volatility

After hitting an almost seven year low of $US0.6827 in January the Australian dollar has rebounded by 12% or so hitting a high of $US0.7680. The rebound begs the question as to what is driving it and more fundamentally whether the 38% decline from its 2011 high against the US dollar has now run its course. This note looks at the main issues and what it means for investors.

Uncertainty regarding China has been a factor behind global growth worries and share market volatility since mid last year. Put simply the combination of a reversal of gains in Chinese shares, a fall in the Renminbi and uncertainty about the intentions of Chinese policy makers at a time of slowing Chinese growth have fanned fears China was heading for the “hard landing” that China bears have long predicted. The hard landing story for China has been around for as long as I have been analysing it and I suspect at the core of the China bears’ beliefs in it is scepticism that a so-called “communist” country can do well. But while Chinese growth has slowed the hard landing is yet to eventuate. This note looks at the main issues.

To modify Benjamin Franklin, it seems that in Australia nothing can be said to be certain, except death, taxes and endless debate about property prices. Why is it so unaffordable? Are foreigners to blame? Is it a good investment? Is negative gearing the problem? Are property prices about to crash?

The Australian economy performed better than expected in 2015. The mining boom ended around four years ago and yet the Australian economy has still not fallen into the recession that many feared, with non-mining activity helping the economy continue to grow. In fact at 3% GDP growth through 2015, Australian was a star performer compared to the US with 1.9%, the Eurozone with 1.5% and Japan with 0.5%. This note looks at the outlook and what it means for investors.

As if the worry list for investors isn’t already long enough – with emerging markets, China, oil, the Fed – politics (or what some call geopolitics because it sounds better) is also figuring large this year as an issue for investors to keep an eye. High on the list worth watching are the US presidential election, a vote on whether Britain will stay or leave the European Union (“Brexit”), the rise of populism in Europe, tensions in the South China Sea, tensions between Saudi Arabia and Iran and of course an election in Australia. This note takes a look at each.

Shares hitting bear market territory – the fear of fear itself or something more fundamental?

The renewed turmoil in global financial markets on worries about global growth has provided a reminder that we remain in an investment environment of constrained capital growth and high volatility. This has several implications for investors around interest rates and the yield investments provide.

Our view on the financial market turmoil has been covered in the last two Oliver’s Insights – except to add that central banks are now sounding more dovish. This started with the ECB which is now expected to ease at its March meeting and is also evident from the Fed which last night was less positive on the growth outlook and indicated it was monitoring recent economic and financial developments. The probability of a March Fed hike is now just 20% and rather than four Fed rate hikes this year I see only one or none. The Reserve Bank of NZ has also turned more dovish and I expect the RBA to do the same.

2015 saw subdued returns for diversified investors as the global economy continued to grow and monetary conditions remained easy, but worries about deflation, plunging commodity prices, fears of an emerging market crisis led by China and uncertainty around the Fed’s first interest rate hike after seven years with near zero interest rates along with continued soft growth in Australia, saw volatile and soft returns from share markets. Balanced super funds had returns of around 5%, which was not disastrous given that returns have averaged 10.1% pa over the last three years, but still disappointing. 2016 has started with many of the same fears seen in 2015. This note provides a summary of key insights on the global economic and investment outlook in simple point form.

2016 has started much where 2015 left off with basically the same worries driving another bout of share market falls. Geopolitical concerns have played a role but the main issues are uncertainty regarding the Chinese economy, wariness about the Fed raising interest rates and the impact of a rising US dollar and falling Chinese Renminbi.

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