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August Economic & Market Summary

Tuesday, August 09, 2016

Despite the headline grabbing travails of markets so far this year: the New Year meltdown centring on China; and the Brexit vote; all asset classes have generated positive returns for the year to date. Australian listed property is top of the pops with a remarkable 22.4% return while cash has eked out 1.3%. Let’s take a closer look at each of the main asset classes.

Cash

The RBA cut rates by 0.25% at its August meeting, leaving the cash rate at a new historical low of 1.5%. Governor Stevens must have been disappointed with the reaction of financial markets, with a stubbornly high Australian dollar dipping slightly on the announcement of the cut but then bouncing back up again. The Reserve Bank wants to see a lower Australian dollar so as to provide support to the ongoing rebalancing of the economy away from mining to other sectors. A lower Australian dollar helps Australian exporters by making Australian products cheaper to international customers.

Bonds

2016, so far, has been another good year to be a bond investor, with international bonds outperforming most “growth” assets. Worries over a selloff in bonds, given very low yields and with the US seemingly on the brink of a sustained period of interest rate rises, proved to be unfounded. Falling inflation and a flight to safety drove yields even lower; meaning investors enjoyed capital gains (bond prices move in the opposite direction to yields).

If there were worries about bonds prior to this latest rally; these must be even more heightened now given a good proportion of government bonds in some countries sport negative yields (in other words you pay the government for the privilege of lending to it).

Australian Equities

Australian shares have seen a bit of a comeback over the last 6 months. Both fiscal and monetary stimulus in China has led to an uptick in demand, and prices, for the commodities that Australia exports. This has seen a recovery in the beaten up resources sector. For example, Fortescue's stock price has more than doubled since the start of the year. The big miners, Rio and BHP have been somewhat more subdued, putting on 8% over the same period. This is reflective of the greater financial leverage employed by Fortescue; ruthless cost cutting; and a concentration on selling only the highest grade component of Fortescue's overall lower grade iron ore.

International Shares

As well as confounding the RBA, the Australian dollar has not been at all helpful to unhedged international equities investors. Gains on the shares were wiped out by losses on translation into Australian dollars leaving unhedged investors flat for the year. Emerging markets did better, bouncing back from oversold positions and the Chinese stimulus as per Australian shares. Listed infrastructure has also fared well as investors continued to seek out "defensive growth".

To discuss this further or to speak with a Matrium Financial Services Adviser, contact us today on 02 8861 1840.



Important information: 

Matrium Financial Services Pty Ltd, ABN: 34 084 953 177, are a Corporate Authorised Representative of Matrix Planning Solutions Ltd ABN: 45 087 470 200,  AFSL & ACL No. 238256. This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. No representation or warranty is made as to the accuracy, completeness or reliability of any estimates, opinions, conclusions or other information contained in this document. This document may contain certain forward-looking statements. Forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors, many of which are beyond our control. You should not place reliance on forward-looking statements. To the maximum extent permitted by law, we and Matrix Planning Solutions Limited disclaims all liability and responsibility for any direct or indirect loss or damage which may be suffered as a result of relying on anything in this document including any forward looking statements. Past performance is not an indication of future performance.




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