Investment commentary December 2016
Markets shrug off political surprises to finish 2016 on an even keel
Markets began 2016 with a bout of volatility initially due to fears of an economic hard landing in China, then exacerbated by weaker than expected economic data out of the United States and a collapsing oil price. This all turned around rapidly in mid-February as growth data stabilised and investors embraced the idea that monetary policy would come to the rescue again.
Shares shrugged off the shock of the UK’s ‘Brexit’ vote, and have even reacted positively to the surprise election of Donald Trump as President of the United States. It seems that within the space of this year, investors have gone from being spooked by uncertainty to being resilient in the face of previously unthinkable political outcomes.
Of course it’s not all been smooth sailing. The more positive reassessment of the growth outlook, which really began in the middle of the year, has meant that bond yields are now significantly higher than their lows and this has weighed on the performance of defensive assets.
President Trump’s incoming administration is widely expected (at this stage at least) to bring with it large tax cuts and strong infrastructure spending, which would likely boost the economy and end the era of low inflation. Those paying attention during the election campaign will no doubt remember his anti-trade and anti-immigration platforms which would be significantly less positive for growth.
Aussie cash rates may have bottomed
Low inflation in Australia saw the RBA cut interest rates twice, to 1.5%. At the national level our economy has been somewhat insulated from the end of the mining boom by the new boom in housing construction, fuelled by generationally low mortgage rates. Like the mining boom though the benefits were unevenly distributed.
Approvals for new home construction have spent most of the last two years well above the long-term rate needed to satisfy demand. This was partly to address previous undersupply, but can’t be expected to last forever and in late 2016 we’re seeing signs that it is indeed coming to an end. The market now expects the next RBA move to be up, but if the housing market does end up getting much weaker they’ll need to be careful to avoid exacerbating the problem.
As we head into the new year there’s much to feel positive about, but asset prices remain elevated and future returns will probably be lower than in the past, especially for more defensive investments. We know for sure that politics is going to be different in 2017 and it will perhaps be more important than ever to have a diversified investment portfolio.
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