Market update - Winter 2015
The outlook for the domestic economy is mixed, with its performance likely to be led by events on global markets for the remainder of 2015.
Global overview
The word that best summarises financial markets is volatile. Economic factors and geopolitical events continue to drive different views in markets, resulting in marked performance swings across asset classes.
There is a growing realisation that rising inflation levels have the potential to impact financial markets, which has led to a sharp rise in global bond yields. As we head into the second half of the year, the biggest challenge is whether the multiyear bond rally has finally reached its end game.
There are also concerns any moves by the US Federal Reserve to increase official cash rates will result in bond yields moving even higher from current levels. Additionally, equity markets may have moved ahead of fundamentals, making them prone to a correction.
Recent sell-offs in bond and equity markets represent a recalibration across global financial markets. But at this stage, this does not create a prolonged bear market.
It’s true the growth outlook remains mixed, with weaker than expected economic data across a number of regions in the first quarter of the year.
But while the European Central Bank (ECB) has been surprised by the extent of the ‘bounce’ in the European economy given it has only just begun its quantitative easing program, we see little chance of the ECB closing its program before its stated end date of September 2016. This provides tacit support for both bond and equity markets.
Central banks in Japan and China and other emerging markets will continue to reduce cash rates to stimulate their economies. In addition, commodity prices are stabilising, although it will be some time before prices reach levels seen in 2014. These factors in combination should help to support global markets.
At home
In Australia, the challenges facing the economy show no signs of reduction. With the need for structural reform vital, along with global and regional sensitivities, we do not see material change in the domestic economic landscape any time soon.
Property data continues to show positive momentum with house prices in both Sydney and Melbourne still exhibiting growth. However, although the low interest rate environment is supporting higher house prices, we remain concerned about the medium-term outlook. This could impact the strength of the housing market, particularly if there is no broader improvement in the economy and the jobless rate rises.
Furthermore, the performance of corporate Australia remains subdued and the earnings outlook for the banking sector seems to have peaked. So it may be some time before the economy rebounds.
Looking forward
Overall, we believe the domestic economy will continue to moderate further. The near term fortunes of the economy will be linked to the global macro outlook as much as to domestic issues. Financial markets will continue to take their lead from global peers, most notably the US, and we have seen our bond market move in line with US Treasuries in recent periods.
Moreover, the slowdown across China, along with lower commodity prices, and a more benign corporate outlook have the ability to be a drag on the domestic share market for the remainder of the year.
