Quarterly market and economic update | December 2016

Market Commentary

by Theodore Hatsis CIMA®, Head of Research, Centrepoint Alliance

Economic update

The year ended the way it began – with much apprehension and volatility. Calendar year 2016 was a year that most were happy to see the back of and, looking back, you can see why.

It began with a bang as global markets sold-off on China growth fears. Brexit was next in-line to spook investors as Britain’s historical vote, and result to leave the European Union (EU).

The year ended with the biggest shock of all - Donald Trump winning the United States (US) election to become the 45th President of the United States and sweeping the Republicans into power. The result came off the back of a disenchanted ‘middle’ America and, in hindsight, a poorly run campaign by Hillary Clinton and the Democrats. Coupled with chaos in the Middle East and attacks in Europe, 2016 was a year that investors were happy to farewell.

Central bank policy throughout the quarter has continued and remains accommodative, however, many believe that the monetary policy lever used to boost economic growth has reached its limit and is nearing its end.

The Reserve Bank of Australia (RBA), as widely expected, left rates unchanged at 1.50%. The new governor, Phillip Lowe, seemed to be less concerned with the current low-level on inflation, unlike his predecessor.

The December quarter headline CPI rose by 0.5% taking the annual growth rate over the past year to 1.5%.

The September quarter real GDP, as noted in the previous quarter update, fell -0.5%, which is a major concern as the economy contracted for the first time in more than five years – the RBA will be anxiously waiting for the December quarter figures, released on 1 March.

Globally – economies continue to be sluggish, while governments continue with uninspiring fiscal policies.

In the US, the FOMC lifted its Funds target rate by 25 basis points to a 0.5% to 0.75% – the second rate hike in 10 years – off the back of very modest changes to the key economic forecasts. This was somewhat of a surprise to most experts.

All other major central banks including the European Central Bank (ECB), Bank of England (BoE) and Bank of Japan left cash rates steady.

In summary, monetary policies globally remain very accommodative however, global growth remains below trend.

Equity markets

Global equity markets endured a volatile 2016 and the December quarter highlighted what an eventful year it actually was.

The Australian equity market (represented by the S&P/ASX 200 Accumulation Index) rose by 5.2%, a good end to the calendar year that yielded a total return of 11.8% – this was helped by a late year surge in commodity prices. We still believe Australian equities remain expensive on a relative basis.

Global equities

Broader developed markets were generally stronger over the quarter however, volatility did pick up. The MSCI World ex Australian Index returned 7.7% in AUD for the quarter and 7.9% for the year. In the US, the S&P 500 Index rose 3.3%, the Dow Jones gained 7.9%, and the NASDAQ jumped 3.1%.

The price of crude oil and favourable movements in the USD supported European equites. Germany’s DAX returned (7.9%), France (CAC) gained (6.2%) whilst the FTSE All-Share index delivered 3.5% - a result helped again by a weak British pound.
Japanese equities were the strongest again in the region off the back of a depreciating Yen. The Nikkei 225 gaining 16.2%.

Global bonds

Political factors overwhelmingly drove the global bond market in the December quarter.

The 10-year US Treasury yield gained 85 basis points to finish the quarter at 2.44%. The 10-year gilt yield gained 49 basis points to 1.24%, whilst 10-year Bund yields increased from -0.12% to 0.21%.

Australia’s 10-year yields followed suit increasing by 80 basis points to 2.773%.

In summary, the major headwinds we will continue to see are:

  1. US monetary policy and general interest rate movement.
  2. Currency – potential currency war.
  3. Oil supply and general commodity prices.
  4. Geopolitical risks – What will Trump do to trade and general policy?
  5. Australia – housing market.

For more information or assistance, please do not hesitate to contact Theodore Hatsis, Head of Research at Centrepoint Alliance.