The month of September saw investors turn to safer asset classes as geopolitical tensions heightened and uncertainty turned up a notch. With unpredictability so prevalent, the question remains: what will the investment landscape look like come the next quarter?
The Reserve Bank of Australia (RBA) seems to want to deliver the people good news given it delivered a relatively upbeat statement in its latest meeting. The RBA noted that it expects a gradual lift in GDP to occur, given the recent quarterly increase of 0.8% points to signs that the previous quarter’s weakness in GDP growth was a temporary factor. However, the strong employment numbers are not flowing into wage inflation.
Price inflation doesn’t seem to be improving either, not helped by subdued consumer confidence as households continue to service mortgage debt. These weaker factors may cause a headwind in the Australian economy in the next 6 – 12 months. However, there are no indications that the RBA is ready to raise rates, despite countries like the US and Canada taking action. The RBA maintains that it did not cut interest rates as low as other countries and therefore should not be in a hurry to increase rates when these countries do.
In terms of domestic equities, this September month saw the small cap stocks (1.31%) outperform the large cap stocks (-0.15%), bucking a recent trend where large caps had shown greater strength. Australia, in particular Australian retail, was not immune from the Amazon effect. From the announcement that the giant is bringing business down under, we are still seeing negative sentiment in retailers. The main challenge for the Australian market remains finding earnings growth to support the next market upswing.
The US economy, too, is facing low inflation figures, which is not aiding the Federal Open Market Committee (FOMC) in carrying out its intended rate hikes. Nevertheless, markets expect one more rate rise for this year, with a December rate hike given an approximate 70% likelihood. So far markets have taken the prospect of rising interest rates relatively well, although the FOMC is flagging more rate rises next year than is currently anticipated by the market.
In the Eurozone, the European Central Bank (ECB) is also talking of ending its economic stimulus program. However, inflation is still below trend. Furthermore, the Euro (EUR) has risen by about 13% against the US dollar (USD), on the back of USD weakness and growth in the Eurozone. This is somewhat equivalent to tighter monetary policy and has left the ECB in a bind regarding ending its economic stimulus program. There is a risk that reducing economic stimulus could bring the economy to a halt and further strengthen the EUR, which would be negative for the region’s exports.
The outlook on China remains one of moderating yet solid growth. Following higher- than- expected economic growth, indicators appear to show that momentum seems to have eased. It is clear that China’s modest tightening in financial conditions is having some impact, as money supply growth has slowed in line with GDP growth; this is a good thing from a financial stability point to view, suggesting the debt- to- GDP ratio is no longer climbing.
As we approach the end of 2017 we remain watchful on tax reform in the US. Markets have advanced in anticipation of successful tax reform, yet actual implementation remains. The latest information indicates that reform will be phased in over time, which is the minimum that market participants will be expect after such a long wait.