Investment commentary October 2015
The focus of markets again turns to central bank policy, and the intentions of the US, European, Japanese and Chinese policy makers. It seems increasingly likely that we will see further divergence in policy settings in 2016, and that this will lead to more volatility in asset prices. The US, after so long keeping rates near zero and expanding the US Federal Reserve’s balance sheet through unconventional stimulus measures, is treading a fine line in normalising policy. Move too quickly and they risk choking off growth, too slow and they might be seen to be ‘behind the curve’ once inflation begins to trend higher. The other major central banks are combating low inflation and lacklustre growth with low rates and expanded asset purchases. Closer to home the market is now pricing in two further rate cuts from the Reserve Bank of Australia (RBA) over the next year.
Damian Graham, Chief Investment Officer, talks about the focus of markets and performance of shares in October.
A surprise increase in mortgage lending rates from the big four Australian banks and weaker-than-expected inflation data have set expectations for one, or potentially two, rate cuts by the RBA in the near term. Economic growth has been supported by strength in the housing market, but with clearance rates trending lower and banks tightening lending criteria, the outlook looks somewhat more challenged.
Australian shares rebounded strongly, led by the resources sector, which rallied on an improved outlook for the Chinese economy.
The Federal Reserve kept rates on hold as expected in October, but gave a very strong indication that a rate hike in December is very much still on the cards. It is difficult to point to any major improvement in economic data since the September meeting, where they surprised the market by pointing to weakness in the global economy as a factor in their decision to keep rates on hold. Clearly the members of the committee are keen to begin the process of policy normalisation, and the path this takes and the messaging around it will likely be the key story in investment markets for 2016.
US shares were very strong in October, rising 8.4%, which is the best monthly return since 2011. Ten-year bond yields rose to 2.14%, but are very low by historical standards.
The European Central Bank is expected to expand its stimulus program in December in an effort to combat the persistently low inflation across the Eurozone. Unemployment remains high, at 11%, and the Syrian refugee crisis may cause further political instability.
European stocks were among the strongest performers globally, rebounding from a savage selloff in September. Anticipating further action from the central bank, European bond yields fell sharply.
The Chinese government released their new five-year economic plan in late October, indicating a lower level of growth, but with a continuing emphasis on reform and rebalancing the economy away from investment and towards consumption. Perhaps the most significant announcement was the relaxation of the one child policy. While this will only have minimal impact on the near term outlook, it does address the growing concern about China’s ageing population and the long-term risks that brings. During the month we also saw an interest rate cut and the liberalisation of bank deposit rates, which are likely to have a more immediate effect stimulating growth.
The Australian dollar rose mid-month, only to fall back to US$0.71 late in the month on expectations that the RBA will move to cut rates.