Solid US economic data and hawkish rhetoric from several Federal Reserve members saw markets last month start to fear re-commencement of US official interest rates hikes. Whether the Fed hikes rates or not in coming months, a key emerging investment theme nonetheless is a maturing in America’s expansion due to diminished spare labour market capacity. In turn, this continues to favour our long-held defensive stance with regard to growth assets.
- Solid US economic data and hawkish rhetoric from several Federal Reserve members saw markets last month start to fear re-commencement of US official interest rate hikes. While global equities eked out a small gain in local currency terms, US stocks were flat, with strength instead concentrated in Europe,Japan and emerging markets. Global stocks performed better in $A terms due to weakness in the Australian dollar.
- Despite a rate cut from the Reserve Bank, Australian equities weakened last month and underperformed global equities. US interest rate fears also caused listed property to underperform. Commodity pricesalso eased back reflecting weakness in gold (again associated with US rate hike fears), while oil prices rose due to renewed talk of producer cut backs.
- Listed property remains the best performing asset class over the past 12 months, followed by Australian equities and then Australian bonds. Commodities remain the worst performing asset class over the 12-month period.
- August provided the first “reality check” for risk markets in some time. With it now evident that the UK’s “Brexit” decision is having little lasting impact on the global economy, and with US economic data remaining fairly healthy, Federal Reserve officials began to dust-off their earlier plans to raise US interest rates from what are still exceptionally low levels.
- At this stage, however, it’s not yet clear that the Fed will follow through. Either an upsurge in equity market volatility or a strongly rising $US would naturally test the Fed’s resolve. It’s also possible that US economic data could soften somewhat.
- Either way, a key emerging investment theme is a maturing in America’s expansion due to diminished a key emerging investment theme is a maturing in America’s expansion due to diminished a key emerging investment theme is a maturing in America’s expansion due to diminished a key emerging investment theme is a maturing in America’s expansion due to diminished spare labour market capacity. Either US growth will slow or the Fed will raise interest rates in coming months – either of which should be problematic for equity markets. In turn, this continues to favour our long-held defensive stance with regard to growth assets.
- What’s more, this theme also continues to support our view that the $A will eventually weaken, which also favours our overweight view on (unhedged) international equities against Australian equities. It alsofavours our underweight stance with regard to commodities.
- That said, whether US growth slows or the Fed first hikes rates will affect the course of global bond yields. At this stage, we retain our neutral view on bonds versus cash.
- One change to our asset allocation views, however, is to move back to a neutral position with regard is to move back to a neutral position with regard is to move back to a neutral position with regard is to move back to a neutral position with regard to listed property. Thanks to low interest rates, property valuations have become especially stretched and the past month has demonstrated how sensitive this sector’s performance will be to any serious change in bond yields. Should the $A weaken a lot further it could also bring into question the likelihood of the RBA cutting interest rates again this cycle.
ASSET BENCHMARKS
Cash: UBS Bank Bill Index; Australian Equities: S&P/ASX 200 Index; Australia Bonds: Bloomberg Composite Bond Index;Australian Property: S&P/ASX 200 A-REITs; International Equities: MSCI World (developed market) Index, unhedged $A terms; Commodities: S&P GSCI Light Energy Index, $US term