Dr Shane Oliver, Head of Investment Strategy & Chief
Economist for AMP Capital Investors, provides
weekly updates of the latest issues regarding financial
markets and the economy known as 'Oliver's Insights'.
In addition to 'Oliver's Insights'
a Monthly Market &
Economics Report is also highlighted.
Compiled by Dr Shane Oliver and the
Investment Strategy & Economics team, the
reports provide a
monthly snapshot of major economic and investment
market issues designed to keep you updated on the
latest financial news and trends.
Please select from the links below.
Edition 4
9 Feb 2012 -
Australia - the RBA, economy, A$'s and shares.
While the Reserve Bank of Australia (RBA) left
interest rates on hold for the "moment" there is
a strong case to ease further based on weak
conditions outside mining and further tightening
being delivered by the rising A$. Furthermore,
monetary conditions are still tight,
particularly for small businesses. We expect
another 0.25% to 0.5% in cuts by mid-year.
The
RBA’s somewhat tougher stance contrasts with the
ongoing easing in monetary conditions being seen
in the US and Europe. This will provide a
further boost to the A$ and constrain the
relative performance of Australian shares, even
though the broader recovery in share markets is
likely to continue.
Australian and international bonds were the best
performing asset classes last year as sovereign
bond yields in Australia and major global
countries fell to record or generational lows.
Bond yields are low because of low growth, low
inflation, low short-term interest rates,
central bank bond buying in the US and
elsewhere, and safe haven demand. Since there
are good fundamental explanations for low bond
yields this would suggest that bonds are not in
a bubble.
However, the scope for further sharp falls in
yields is limited. Bonds are also poor value
with yields running well below long term
sustainable levels. Unless there is a return to
global crisis or recession or both, this all
suggests subpar returns from sovereign bonds on
a medium term basis, specifically over the next
3-5 years.
Edition 2
25 Jan 2012 - The
global economy looking a little less scary.
The
last month or so has actually seen better news
regarding the global economy – European Central
Bank (ECB) action appears to have reduced the
risk of a banking crisis in Europe, US economic
data has continued to surprise on the upside and
Chinese economic data remains consistent with a
soft landing.
While shares are at risk of a short-term
correction and Europe remains a source of
volatility, the improved global economic
backdrop is a positive sign for shares and
related growth trades going forward.
The European debt crisis continues to dominate
financial markets and undermine confidence. However,
US economic data has been resilient in the face of
global turmoil. The US ISM manufacturing survey
improved in December rising by 1.2 points to 53.9,
suggesting that the US economy ended 2011 with
activity expanding at a +2 % GDP pace. The American
labour market picked up with a gain of 200,000 jobs
in December and the unemployment rate falling
further to 8.5%. US house prices drifted lower with
the Standard & Poor’s Case Shiller Major 10 cities
Index recording a 1.1% decline in October. More
encouraging was the Conference Board’s confidence
survey which rose almost 10 points to 64.5 in
December, as well as the Bloomberg Consumer Comfort
Index which climbed to -44.8 in the period ended 31
December, the best reading since mid-July 2011. US
nominal retail sales proved mildly disappointing in
November recording a marginal monthly rise of 0.2%.
The US Federal Reserve (Fed) maintained the federal
funds rate target range between 0% to 0.25% at its
December meeting, reaffirming previous guidance that
interest rates should remain “exceptionally low”
until mid- 2013. In the meeting minutes for
December, the Fed noted that there were a number of
factors restraining US economic.......
Edition 36
24 November 20011 - The threat from Europe, how big?
The European debt
crisis is worsening, posing a major risk to
global growth and the investment outlook for
2012. A mild recession in the Eurozone wouldn't
be a major problem for the global economy, Asia
and Australia, but clearly the risks are rising
that it will be a deeper recession.
Shares are good
value for long-term investors, but the
short-term outlook remains uncertain. A re-test
of early October share market lows is looking
likely. Watch for signs of European Central Bank
quantitative easing and unlimited bond buying
going forward.
US economic data remains consistent with continued
modest growth. America’s economic growth rebounded
in the September quarter with Real gross domestic
product (GDP) expanding by 0.6 % quarter-on-quarter.
The labour market recorded mild jobs growth in
October of 80,000 compared to September’s revised
158,000 result, and unemployment edged slightly
lower to 9.0%. Consumer credit rose US$7.4 billion
in September and retail sales surged but fell short
of expectations in October. The Conference Board’s
confidence survey for October saw a further 6.6
point decline in confidence to 39.8, the lowest
result in the past 31 months. The Institute for
Supply Management manufacturing and services
conditions indices also disappointed in October. In
terms of housing data, the Standard & Poor’s Case-Shiller
major 10-city index revealed that America’s house
prices have largely drifted sideways over the past
three months to August, whereas construction
spending rose slightly in September. The US Federal
Reserve's (Fed) Beige Book survey for September
provided a cautious assessment of the US economy,
with the report describing “the pace of growth as
‘modest’ or ‘slight’ and contacts generally noted
weaker or less certain outlooks for business
conditions”. The Fed left monetary policy unchanged
in November but reaffirmed that it stands ready to
use all its tools if need be. So a third round of
quantitative easing is still on the table.
Europe’s 27 key political leaders met in Brussels
and announced
Edition 35
11 November 2011 -
The Australian dollar and Europe
This note looks at the outlook for the Australian
dollar (A$), having hit US $1.10 several months ago
and weakened since. The key points are as follows:
In the short term
the A$ remains vulnerable to global growth
worries stemming from Europe, where the risks
have increased dramatically with Italy now in
trouble.
However, strong
commodity demand and relatively higher interest
rates in Australia are likely to see the A$
remain strong over the medium term.
Edition 34
4 November 2011 -
Shares
and the long term - how long is long?
With Europe continuing to cause day to day
volatility - it almost defies logic that one little
country amounting to next to nothing in terms of
global economic activity is continuing to have such
a huge impact on global investment markets - this
note looks at shares over the long term relative to
cash and bonds. The key points are as follows:
The
historical record indicates that shares
outperform bonds and cash over the long term.
But
the long term should be seen as more than 10
years. It's not unusual for shares to go through
lengthy periods where they underperform cash or
bonds.
In
this context, the poor experience of the last
few years, and the last decade in the case of US
and global shares, is not unusual.
Edition 33
28 October
2011 -
Has Europe done enough and
what does this mean for the world?
Europe has announced plans to write down more
Greek debt, recapitalise banks, expand the
firepower of its bailout fund and strengthen
fiscal integration.
Apart from a lack of details, the latest
response suffers from a number of weaknesses and
it’s doubtful it will mean the end of the
European debt crisis. The vicious cycle of
fiscal austerity, weaker growth, budget
blowouts, ratings downgrades and more fiscal
austerity will likely remain. Europe desperately
needs easier monetary policy.
The latest plan should help avoid a near-term
global financial blow-up and it adds to
confidence that global growth will remain
positive (albeit sub-par) which should offer
some support for share markets which have been
fretting about a global recession.
Edition 31
14 October 2011 -
Outcome-based investing – new ways
of
managing multi-asset portfolios.
Constrained investment returns and increased
volatility
are likely to be with us for a while.
As a result, we are likely to see the
introduction of more funds focused on delivering
predetermined outcomes for clients with a
greater reliance on asset allocation and a wide
range of sources of return.
This is not to say the conventional approach to
managing diversified portfolios with its focus
on equities for growth funds is wrong. Shares
will continue to provide superior long-term
returns and are appropriate for long-term
investors. But an outcome or absolute return
approach may be worth considering for those with
a shorter-term investment horizon or specific
needs, for example, specific income
requirements.
Edition 30
28 September 2011 -
What the world needs now -
The global economy back on the brink.
The
falls in share markets since April have been due
to poor global economic data and political
dysfunction in the US and Europe.
After falls of 20% or so, shares are good value
for long-term investors but it’s still too early
to say they have bottomed.
For
confidence that shares have bottomed look for
Europe to follow through with expanding the
firepower of its bailout fund, aggressively
buying sovereign bonds and recapitalising its
banks along with concerted global monetary
easing including in Asia and Australia.
Edition 28
16 September 2011 -
Asia and emerging countries vulnerability
to a US/European
downturn.
The European debt
crisis is still far from resolved and while we
see growth in the US avoiding a return to
recession, the risk is significant.
The experience of
the global financial crisis warns that the
stronger structural fundamentals of Asian and
emerging countries won’t necessarily protect
them from a downturn in advanced countries.
However, it also
indicates the emerging world can continue to
perform better than advanced countries. Over
time this likely means a continuation of the
favourable trend in Asian and emerging market
shares even though traditional global shares
remain mired in a secular (or long-term) bear
market.
Edition 26
02 September 2011 -
Why yield matters for investors - particularly now.
In a world of constrained and volatile
investment returns, the yield – or cash flow -
from an investment will be increasingly
important.
This is particularly the case with shares. In
recent decades, investor focus has mainly been
on capital growth, but dividends have accounted
for more than half of the return delivered by
Australian shares since 1900.
September 2011
-
Monthly Market & Economics Report
Global economy
Review:
The past month has been characterised by a marked
increase in pessimism and risk aversion globally due
to renewed sovereign debt issues in Europe, the US
debt ceiling debacle and the subsequent loss of its
AAA credit rating from Standard & Poor’s, and weak
economic data. Economic indicators showed a slowing
in the US economic recovery with June quarter gross
domestic product (GDP) revised down to just 0.2%
quarter-on-quarter (qoq), compared to original
estimates of 0.3% qoq. US retail sales for July
rose, although surveys showed consumer sentiment was
at its lowest reading since 1980. On the positive
side, the key Institute for Supply Management (ISM)
manufacturing conditions survey fell by less than
feared in August and is well above the level of 42
that is normally associated with recession. Payroll
employment, however, stalled in August increasing
the likelihood that the US Federal Reserve will
implement further stimulus following its meeting
later this month. This is initially likely to take
the form of extending the duration of its balance
sheet, but a third round of quantitative easing,
i.e. QE3, is highly likely to follow in October or
November.
In early August, in response to increasing
turmoil...
