Investment commentary November 2015
As the year draws to a close investors are looking ahead to 2016 with mixed feelings. The growth outlook is generally improving across the major economies although there are some concerns about China. Interest rates in the US will begin to rise but further monetary stimulus is expected in Europe and probably also Japan.
It’s likely that some of the things that have worked well during the extraordinary period of co-ordinated global monetary stimulus will come under pressure once near-term risk returns to the interest rate outlook.
As always a diversified approach will have the highest chance of success, but investors may need to become accustomed to lower absolute returns and an increase in short-term volatility.
Data released mid-month showed surprisingly robust growth in employment in Australia and a drop in the unemployment rate to 5.9%. There is some scepticism among economists about the strength in the data, which is not consistent with recent trends and may be subject to later revision.
A sharp decline in commodity prices impacted resources shares, which fell nearly 12% for the month. Commodity prices have been falling for several years now as the investments in new capacity, made in more buoyant times, have significantly increased supply.
The more recent falls in prices have had more to do with a change in the outlook for demand – in particular, the impact of a shift in China’s economic development away from investment and towards domestic consumption.
While mining shares were a drag on the market, Australian shares finished November only slightly down.
The US Federal Reserve voted to increase interest rates in early December, the first time rates have been lifted since 2006. Interest rates have been near zero for so long that a Bloomberg article earlier this year suggested that nearly one third of traders on Wall Street have never experienced anything else.
Guidance from the Federal Reserve is that they don’t want to raise rates too quickly. Given the importance of the US economy to global markets the future path of US interest rates will have wider ramifications across all asset markets and may lead to higher volatility.
US shares were flat in November and bond yields rose slightly.
European stocks were again strong performers last month. European companies should see a boost to competitiveness from the fall in the Euro, and the gradual improvement of economic growth will support the earnings outlook.
The recently-elected minority government in Portugal fell to an anti-austerity alliance, and while the new Socialist government have committed to abide by EU rules, their dim view of spending cuts and structural reform are a break with the past and may contribute to further discord amongst the Euro member countries.
China’s currency, the renminbi, was added by the IMF to the group of reserve currencies in its ‘Special Drawing Rights’ (SDR) basket. This is largely a symbolic measure but is a sign of China’s growing importance to the global economy. It’s also a validation of recent financial market reforms.
The manufacturing sector has been struggling of late, but services and consumption are strong. This shifting of the economy to a more sustainable domestic focus is a policy goal, but is likely to cause lower levels of aggregate growth.
The Japanese economy has again slipped into a recession and expectations are that an increase in fiscal and monetary stimulus will be required in the near term.
The Australian dollar strengthened in November as the strong jobs number reduced the likelihood that the Reserve Bank of Australia would cut rates.