On Wednesday 27th of January 2016, Mike Hawkins (Australian Equities Portfolio Manager) and Stephen Arnold (International Equities Portfolio Manager) discussed in detail the current market and their expectations for the outlook from here.
If you are interested in hearing their views, please click here.
While the Australian economy continues to be held back by a range of structural challenges, the cyclical outlook for 2016 is a little brighter.
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Global growth expectations continue to be pared back, which together with the strong commodity supply pipeline continues to undermine commodity prices.
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Recent US partial indicators suggest the economy is shrugging off yet another unseasonably harsh winter and weak start to the year. Real GDP is expected to have risen at an annualised rate of 2.5–3% in Q2, a pace we broadly expect to be maintained in the quarters ahead. That said, partial economic data is far from unencumbered good news.
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Viewed in isolation, the 0.9% real seasonally adjusted increase in GDP in the March quarter might look a good result. It does not take much digging into the detail to uncover a less ebullient perspective; indeed, even that 0.9% increase in the March quarter left growth on year earlier levels at a subdued and sub-trend 2.3%.
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US Q1 GDP growth of only 0.2% annualised was weaker than expected. Expectations of Fed Funds Rate lift-off have been pushed back in line with moderating growth expectations. April saw a pick-up in employment growth and solid retail trade data.
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The iron ore price fell by 47% over the course of 2014. It has fallen a further 25% since. At the company level this means lower profits and capital expenditure, job cuts and lower wages. The economist might express it this way: lower commodity prices flow into Australia’s Terms of Trade, which are now down 26% from the peak in the September quarter 2011.
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Remember the so-called QE “Taper Tantrum?” In Congressional testimony on 22 May 2013, the then Fed Chairman Ben Bernanke indicated the Fed would likely start slowing – or “tapering” the pace of its bond purchases later in the year, conditional on continuing good economic news.
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Exquisite short term investment logic can be blown away in the blink of an eye in response to an unexpected exogenous event. That is why we prefer to invest where intrinsic value is on our side, and preferably and if appropriate, when we are paid to wait.
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In our The View From The Outer of 31 July, 2014 we wrote of the likelihood that the FOMC (Federal Open Market Committee) would hold the Federal Funds Rate “lower for longer” while a broader range of measures of the US labour market indicated continuing significant slack remains.
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