Investment commentary March 2015
The strong returns in February did not continue into March. The Australian market closed the month flat, while global shares were mixed. Central bank policy remains the key driver of markets in the short term and the return of volatility across all asset classes is expected to be a feature of 2015.
The RBA left interest rates on hold in March, but expectations are that they will cut rates at least once more this year. Market economists are somewhat divided on the appropriate course for monetary policy, with the imperative of supporting a weakening economy being weighed up against the danger of further inflating the housing market.
Australian shares were flat overall for the month, but there was significant divergence within sectors. Financials, Healthcare and Industrials were up strongly, Energy and Materials fell in price, giving back some of the gains from last month.
The pace of economic growth in the US has moderated over the northern winter, potentially due to weather-related effects as was the case last year. Jobs growth however remains strong and the unemployment rate has reached 5.5%, a level considered consistent with full employment. All eyes are now on wage growth, looking for signs that the economy is approaching capacity. The Federal Reserve has indicated it will begin to raise interest rates soon, and will be guided by the economic data rather than working to a strict timeframe.
Ten-year government bond yields fell below 2% again and equities declined.
News in Europe was mixed. On the one hand there are signs that the long economic slump is coming to an end. On the other there’s furious debate about how to deal with Greece's inability to fund its government debt. The new Greek government agreed to an extension of the 2010 bailout package, and has until July to renegotiate terms with the ECB, IMF and European Commission, collectively known as ‘the Troika’. The political situation is such that both the Greeks and the Troika need to show their constituents that they are fiercely resisting compromise, however failure to reach agreement could see a Greek default or exit from the Euro currency which would negatively impact all parties.
European stocks extended their strong run and bond yields declined further as the ECB began its quantitative easing.
China's vice premier Li Keqiang's speech at the National People's Congress reconfirmed the commitment to reform, which will see lower headline economic growth as the country reorients itself towards stronger domestic consumption at the expense of exports. He also spoke of holding companies accountable for their impact on the environment.
A survey of business conditions in Japan, the Tankan, came in below expectations for March, indicating that corporates in Japan are pessimistic about the outlook. A majority of Japanese economists surveyed by Bloomberg now are expecting further action by the Bank of Japan to stimulate the economy.
The Australian dollar was steady at US78¢ in March, although it has fallen to US76¢ in the first week of April. A widely held view among institutional investors in 2015 is that the US dollar will continue to strengthen against other major currencies. This is consistent with the US exhibiting strong economic growth and the beginning of monetary policy normalisation. Markets though have a tendency to confound the consensus and so while we hold the same view of US dollar strength, we’re cautious and expect volatility.
The iron ore price fell below US$50 per metric ton in early April and while production and transport costs have fallen, at these prices only the major producers are likely to be profitable. Deutsche Bank is suggesting the price will fall below US$40 and that global consumption will shrink for the first time since 2009.
The oil price also fell below US$50 per barrel. With the price slump now extending to nine months, solvency concerns for more recent entrants, who tend to be higher cost producers, must be coming to the fore.