Michael Winchester, Head of investment Strategy explains the investment landscape.
Recently, the markets have been characterised by a handful of consistent themes: slower economic growth, lower interest rates, slower manufacturing activity, falling consumer confidence and the well-publicised trade tensions between the US and China.
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|# SuperRatings Credit Rate Survey 30 June 2019
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Past performance is not indicative of further performance.
Oddly enough, despite the generally deteriorating economic indicators and low earnings growth, most The Australian market (ASX 200) rose almost 20% over the six months, US shares (S&P 500) were up 17.3% and European shares (Euro Stoxx 50) up 15.7% (Source: First State Super Investments).
So why did share markets perform well in what was a broadly unfavourable environment for growth and earnings? It’s all to do with changing interest rates.
From July to December last year, central banks were raising interest rates to take the edge off the strong economic growth figures. But this had a greater impact than expected and by Christmas, with share markets down 15% to 20% from their peak, central banks reversed their tightening policies and began easing rates.
Australia’s Reserve Bank joined in, cutting rates by a quarter of a per cent in both June and July, taking the cash rate to a record low of just 1%. An environment of falling interest rates is great for defensive assets like Australian bonds because when rates fall, the market value of bonds rises. The local bond market returned 6.6% for the six months and 9.5% for the year to 30 June.
The most likely reason behind the strong share market performances is that investors are seeking better returns — ‘chasing yield’ — from shares because the return from fixed income investments is at such low levels. It’s also possible that investors are comfortable with central banks’ efforts to turn economic growth around. Either way, we’ve seen quite poor economic news translate into higher share prices.
But there’s a limit to the bad news-good news conundrum. Over the period, we saw plenty of caused by trade tensions and geopolitical unrest. Looking ahead, if fears of a trade war, rate increase or a recession take hold, then bad news may begin to shape market sentiment.