By CHRIS RYLANDS
RESEARCH MANAGER, WEALTH ADVISORY
Chris.Rylands@williambuck.com

Cash

There was no Reserve Bank of Australia (“RBA”) meeting scheduled in January, leaving February as the first month for the Board to meet and consider the level of domestic interest rates. The Board left interest rates on hold at 2.00% as expected, however, Governor Glenn Stevens did make reference to the recent volatility in global markets and the potential for it to drag on domestic economic growth. 

Domestic economic data remains reasonable given the slowdown observed in other areas of the global economy. Unemployment data has recently been stronger than expected and the January inflation reading of 1.7% remains below the RBA’s upper tolerance level of 2%. The RBA did reassure investors that it is willing and able to cut interest rates should the recent financial market volatility leak into the domestic economy. This message was consistent with the March meeting where interest rates also remained on hold at 2.00%.

The RBA was under considerably more pressure for the remainder of March after global events caused a strong rally in the Australian dollar (“$A”). The currency bounced after changes to United States (“US”) interest rate expectations caused the US dollar (“$US”) to weaken against almost all the major currencies. A weaker currency has been an extremely important factor in domestic economic strength and increases the likelihood that the Board will try and “talk down” the currency at its April meeting. 

Recent changes to bank funding profiles have provided some attractive term deposit rates. 
The highest term deposit rates currently available are 3.00% across 3 months, 3.10% across 6 months and 3.12% for 12 months. 

Fixed Interest 

A sharp decline in risk appetite during January led to an increase in volatility and weakness across equity markets. Global fixed interest markets saw increasing inflows as investors sought a safe haven. The weight of money pushed yields lower and prices higher. By the end of January the global fixed income sector increased by 1.65%, whilst the Australian sector rose by 1.22%.
 
Risk appetite declined further in February, adding to investor caution and driving further support for the sector. Concerns over global growth and commodity prices resumed, convincing many investors to remain parked in fixed income investments.  As a result, fixed income markets continued to climb, with global fixed income rising 1.09% and the domestic sector posting a 1.03% increase. The positive returns from the sector during the first two months of equity market volatility provided excellent portfolio diversification. 

Sentiment became much more positive during March as global central banks moved to restore confidence.  March saw some of the recent gains in the sector reverse as volatility in global equity markets declined. Investors cheered the likelihood of lower US interest rates for longer and the renewed confidence caused investors to relocate some of their fixed income holdings back into the equity market. 

Australian Equities

The Australian equity market experienced a volatile start to 2016, finishing the month of January down -5.48%.  Global market weakness was the key driver, with the Australian market generally following offshore market moves. Commodity stocks once again led the market lower, with Materials and Energy falling -9.1% and -6.5% respectively for the month, as concerns around Chinese growth intensified. 

The selling pressure grew stronger in February as investors weighed continued weakness in the global economy. Investors also focused on the domestic reporting season, which was generally better than expected. Aggregate profits rose 2.10% for the half year compared to the prior period. Dividend payments rose by 7.1%, with 62% of companies lifting payment levels. 

The major themes for the resource sector remained cost cutting and lower dividend payouts as profits declined. Much of the bad news had already been factored into share prices, leading to a recovery in the Materials sector of 9.12% during the month. 

The other main area of focus was the outlook for bank profits and dividend payouts. The reporting season saw banking bad debts start to tick up, adding to existing concerns about the need for capital levels to protect against a downturn in the property market. The negative sentiment surrounding the sector led to a decline of -5.32% for the month.  The market as whole declined 1.76% during February. 

Resources vs Banks – Year to date performance to end of February

 
Source: Ord Minnett 

The theme of stronger Resources stocks and weaker Banking stocks continued during March. The remainder of the market was generally well supported as investors continued to embrace the prospect of US interest rates remaining on hold. The rebound in the $A did limit gains for those companies with offshore earnings which benefit from a weaker currency.  

 

Global Equities

Global equity markets were dominated by threats of slower growth in China and a sharp drop in oil during January.  Chinese economic data was generally weaker than forecast, with investors alert for further weakness in the currency. Volatility and caution remained the overarching themes, however, shares globally came off their lows towards the end of the month on hopes of further central bank action. The sector finished the month off 3.23%. 

January’s themes remained in focus during February. The market volatility reflected uncertainty surrounding the US Federal Reserve’s March meeting to decide on interest rates. Global equity markets began to rally towards the end of the month as rumours of further easing from global central banks gained traction, with the sector down -1.7% for the month.  

Co-ordinated action from central banks arrived in March, with the European Central Bank announcing a raft of new measures to spur European economic growth. A further boost was provided by the US Federal Reserve when it announced that had reduced its forecast of interest rate hikes from four to just two in 2016. Markets responded favourably to these developments, led by a strong bounce in US equities. 

Alternatives

Hedge Funds and alternative strategies also provided significant diversification benefits during January and February. Positive contributions from fixed income, currencies and commodities generated strong returns 2.8% and 3.2% in January and February respectively. Returns have moderated somewhat during March as equity markets and risk appetite rebounded.