Expect the unexpected: Preparing for uncertainty in global markets
Whilst there is uncertainty amongst investors at the outlook for global markets 2017, if 2016 taught us anything it’s to expect the unexpected.
While it may seem 2016 was characterised by unexpected events such as Britain’s decision to leave the European Union and the result of the US election, every year markets respond to unpredictable circumstances.
As a result, SMSF investors also need to be prepared for unexpected events.
Here, we explore some of the dynamics that are likely to affect global markets this year. We also look at Nader Naeimi's, (Head of Dynamic Markets, Multi Asset Group, AMP Capital) approach to investing given current market conditions.
According to the Reserve Bank of Australia’s most recent Minutes of the Monetary Policy Meeting, global business conditions are improving, albeit in a muted fashion.
The minutes noted that, “growth in GDP of Australia's major trading partners had picked up a bit over recent months, although growth remained a little below average.”
The bank says downside risks to global inflation have reduced somewhat, partly because commodity prices improved during 2016.
Commenting on the outlook for China, one of Australia’s most important trading partners, the bank said, “economic activity in China had continued to be supported by accommodative financial conditions and public spending, particularly on infrastructure.”
It did note high levels of debt in China are still a risk to the outlook. But the government had put in place initiatives to deflate the housing market, which was a positive for economic conditions.
In Europe, the board noted, “economic activity in the euro area had continued to recover. Members noted that some economies in the euro area were facing larger structural challenges than others. In Italy, the level of GDP remained lower than it had been prior to the global financial crisis, non-performing loans had remained at a high level and gross public debt was around 135 per cent of GDP.”
Importantly, in the US economic growth is meeting expectations. Although business investment remains sluggish, consumers are starting to spend with more confidence thanks to the strong labour market.
But the Reserve Bank did note it was too early to tell what effect the new US administration would have on the outlook for economic activity in the US and around the world, even though the share market has performed well in recent months.
Back home, a major driver of economic growth is the commodity cycle. Nader Naeimi reminds investors that the resources boom that ended in 2008 was largely driven by a major pick-up in Chinese investment in Australia’s resources sector.
“Since then commodities have experienced a major washout, as evidenced in the reduction in the oil price,” says Naeimi.
This represents a buying opportunity for some of AMP Capital’s funds. Says Naeimi: “so when you see global growth growing and China, stabilising commodity prices look good. We have seen a reasonable bounce in commodity prices already. But if there are falls from here that could be a good time to buy.”
In particular, Naeimi says commodities such as copper and precious metals make a good diversifier in a portfolio and also offer a hedge against inflation, which is one of the major variables investors consider when they make investment decisions.
“When you look at putting a portfolio together expectations play a big part. At the moment, inflation expectations are so low, if they fall again it won’t be a surprise. It would be a surprise if inflation goes the other way. That would surprise a lot of people,” he says.
As to Naeimi’s view of the direction of commodity prices this year, he says it won’t be one tide lifting all boats, as is often the case in a bull market previously. That is, different commodities will behave in different ways, depending on their market cycle.
“Investors need to be a lot more circumspect about their commodity investments and look at their allocations on a rotational basis. When market sentiment is depressed we buy, and when sentiment is overly optimistic we sell. Overall, the commodities market is becoming more of a trading market,” he adds.
The message to SMSF investors is to stay across what’s happening in commodity markets given how critical they are Australia’s economic growth.
But it’s often worth leaving decisions about the right way to invest in the commodities market to specialist fund managers, given how specialised this area is.
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