Background – What’s happened in global markets in recent weeks?
The past few weeks have seen increased volatility across global markets. This has particularly impacted emerging markets and currencies, where growing concerns over the economic slowdown in China have put downward pressure on commodity markets and emerging market equities.
In the developed markets, US shares are down 6.3% month-to date, and European shares have now fallen a meaningful 15% from their highs of April 2015. In the Asia-Pacific region, we are seeing Chinese shares trading 35% below their 2015 highs (up 150% in the 12 months ending mid-June 2015); Australian shares are down 15% on the same basis; and New Zealand shares are down just on 5%.
It has been apparent that the Chinese economy is going through a difficult adjustment period. Transitioning from a global manufacturing powerhouse to a consumer-led growth model does not happen overnight. Recent turbulence in the Chinese market, a modest devaluation of the Chinese Renminbi’s exchange rate, and disappointing export data and industrial activity have all raised concerns.
In light of the above, the world economy remains in reasonable shape. The US, European and Japanese economies are all in recovery mode and China, while slowing, is still likely growing at over 5% in real terms. Growth in Australia and New Zealand is being slowed by a reduction in commodity prices. Falls in the Australian and NZ dollars, together with encouraging monetary policies from the Reserve Banks, are providing a cushion to maintain acceptable growth rates.
Looking to the future…
China: We expect continued short-term volatility, but longer-term growth
We are still likely to see periods of uncertainty in China, its Asian trading partners, and commodity prices. Whilst caution should be used in these markets in the near-term, we do not expect an uncontrolled deceleration of the Chinese economy. The Chinese government has both the ability and willingness to cushion its economy. In addition, recent indicators on housing prices and retail sales have shown tentative signs of stabilisation.
United States: Healthy growth expected, but the timing of the US Federal Reserve’s interest rate hike is more uncertain
In the United States, the Federal Reserve has a complicated decision on whether they will raise interest rates. It is still likely a change will be made in September, but it’s now a very close call. Importantly, this decision would be based on improving US economic conditions. US employment growth remains strong and the broader economy has reaccelerated after a slow start to 2015. We continue to expect healthy US growth of 2.5-3% over the next 12 months, which should help push the global economy forward.
Europe: We expect continued recovery, given strong fundamentals
European financial markets have faced significant downward pressure in recent weeks. But the domestic euro zone economy continues to improve, and boosts from a cheaper exchange rate, lower oil prices, aggressive government policy, and attractive share valuations, provide the building blocks for a continued expectation of strong performance in this market over the next 12 months.
Australia and New Zealand: A bumpy road to recovery with an end to the resources boom
The main challenge for the Australian and New Zealand economies, and for their associated share markets, is an end to the resources boom. This can be seen in the plunging prices of bulk commodities, such as iron ore and coal (Australia) and of agricultural commodities such as milk and timber (NZ). However, economic growth rates still compare favourably with growth in recovery-mode regions such as the Eurozone, Japan, and even the US. Weaker commodity prices are not all bad news – they are driving the value of our currency down, which is proving to help tourism and import-competing industries; and they are keeping inflation low, thereby giving the Reserve Banks of both countries scope to cut interest rates further, if required. The return on Australian shares now stands at approximately 5.1%, which is still twice that of more conservative options such as term deposits.
What should you do with your investments?
In periods of volatility, it is important to remember that markets rise and fall, particularly over the short term. It’s best to avoid knee-jerk reactions at the risk of ‘locking in your losses’—because you don’t truly feel the pain of market declines until you sell investments at a low. Sometimes, short-term volatility provides good buying opportunities. We are urging all of our clients to remain calm, and maintain proper diversification.
As always, if you want to evaluate your specific situation, contact us on (02) 49 434876.