The latest commentary on investment markets and the performance of our investment options.
Local market up while US market takes a breather
The local share market (S&P ASX200) rose 2.7% over March to finish at 5864 points, just shy of the psychologically significant 6000 level. During the month, the market hit highs not seen in two years. Eight years have now passed since the depth of the global financial crisis but the index is still more than 10% below the all-time highs set in 2007.
Despite not reaching its pre-GFC highs, the local market index (including dividends) has earned almost 6% per annum over the last ten years, a reasonable outcome given the extent of the damage caused by the financial crisis.
US catches a breath
In the US, the share market took a break from its recent positive run, finishing flat for the first month since October 2016. Many commentators attribute the share market’s good recent run to President Trump’s election victory, but the groundwork for the strong performance was set well before the election by the Federal Reserve’s low interest rate policy and its impact on unemployment, consumer and business confidence.
It’s likely that the pause in the market’s rally was caused by a combination of investors wanting to see evidence of further economic and earnings growth, and concern about the already high valuations of US stocks.
UK and Europe rise on positive investor sentiment
European and UK shares also finished the month higher. The European Central Bank maintained its low interest rate stance, suggesting that low rates need to be sustained for the foreseeable future. The bank also forecasted a lift in economic growth throughout the union, which helped keep investor sentiment positive. At the end of the month, UK Prime Minister Theresa May enacted article 50, the start of negotiations to leave the European Union, but this was not enough to dampen the mood of investors.
Credit growth troubles the RBA
The Reserve Bank of Australia (RBA) left interest rates on hold as widely expected, alluding to an extended period of steady rates.
While low rates have helped lift consumer confidence, there is some concern about the growth in credit that has fuelled the investment in residential property.
The main concern is the growth in investor loans and the level of debt in the housing market. The bank is concerned that a rise in borrowing rates or unemployment may cause defaults to increase significantly. If the property market were to unwind in a disorderly fashion, this could cause significant difficulties for the economy. Seeking to use prudential measures to reduce the riskiest lending practices continues to be a focus for regulators.
RBA encourages strong lending standards
Growth in household borrowing, largely to purchase housing, continues to outpace growth in household income. By reinforcing strong lending standards, the recently announced supervisory measures should help address the risks associated with high and rising levels of indebtedness. Lenders need to ensure that the serviceability metrics that they use are appropriate for current conditions. A reduced reliance on interest-only housing loans in the Australian market would also be a positive development.
Source: RBA media release