Below trend growth to continue
Nick Ryder, highlights that January was a difficult month for financial market with renewed investor jitters over slow growth in China and falling commodity prices.
Welcome to our February monthly market update.
Following the reduction in equity prices, share market valuations are more attractive in most of the major markets, however, we expect that the themes driving investor nervousness may persist until mid-2016.
In Australia, the most attractive parts of the market are in the small to medium-sized businesses where companies are exposed to structural growth such as increased tourism, Chinese consumers and services such as healthcare and education.
Internationally, we continue to favour Europe, Japan and Asia over the United States where earnings continue to be impacted by the stronger US Dollar.
Although we remain underweight in fixed income, we prefer floating rate corporate bonds and are beginning to see value in international credit.
International credit has underperformed this year but should provide attractive returns, if (as we have assumed) default rates remain relatively low over the next few years, outside the materials and energy sector.
Bank of Japan goes negative
In a surprise move, the Bank of Japan cut interest rates on excess bank reserves from 0.1% per annum to -0.1% per annum. The move is designed to force Japanese banks to lend money rather than keep it on deposit with the BoJ.
Equity markets had their worst start to the year in the month of January since 2009, as falls in oil and other commodity prices and further weakness in the Chinese Yuan spooked investors:
• Commodity prices were 5% lower with oil prices down by around US$3.50 per barrel while gold rose about US$50 per troy ounce.
January was a difficult month for financial markets with renewed investor jitters over slowing growth in China and falling commodity prices.
In the United States, the advance GDP reading showed that growth slowed to an annualised rate of 0.7% in the fourth quarter. Other indicators such as the ISM manufacturing and non-manufacturing surveys also point to a slowdown in activity over the last few months.
The weaker data and recent financial market volatility has seen markets cut back expectations for US interest rate rises in 2016. Some of the recent softness can be attributed to the impact of the stronger US Dollar. However, lower fuel prices appear to be supporting consumer spending and, with continued growth in the housing market, the US economy should continue to generate reasonable growth in 2016.
In Europe, the economic recovery is continuing at a gradual pace and unemployment has continued to fall, with the December reading at 10.4%, down from 11% in mid-2015. Inflation has increased a little, with core annual inflation hovering at around 1% – still well below the ECB’s 2% target.
In the UK, the Bank of England, which several months ago had suggested following the US Fed in raising interest rates in early 2016, has elected to keep interest rates at 0.50% per annum. The market is now not expecting any rate rises until the third quarter of 2018.
In China, economic data has showed that the economy continues to grow, but at a slower pace. GDP grew 6.8% year-on-year in the December quarter, down from 6.9% in the prior quarter. Growth in fixed asset investment also slowed in 2015 and China’s official manufacturing PMI index for January has been contracting for five consecutive months. The economy is transitioning away from investment and manufacturing-led growth towards consumption and services and this weaker data saw further devaluation of the Chinese Yuan in early January.
In Australia, the economy continues to perform reasonably well. The most recent comments from the RBA suggest that they are comfortable with the progress of the economic transition but they have the scope to reduce interest rates further, if growth slips in China or if financial market weakness impacts the domestic economy.
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