4 themes to keep watching
In this article, we outline what SMSF investors need to watch in the months ahead.
Australian growth is sub-par at 2% and this could continue for a while yet requiring more help through rate cuts and a lower Australian dollar. However, we’re already halfway through the mining investment slump and the economy has not crashed as some feared.
1. RBA cash rate cut
The move by Westpac to increase its mortgage rates next month by 0.2% - for both owner occupiers and investors – is not particularly surprising as it flows from the rise in the cost of funding that will flow from higher capital requirements being imposed on the banks. Other major banks may follow.
With the mining investment downturn only about half way through, the last thing the economy needs now is a rate hike for the 30-40% of households who have a mortgage given the threat it will pose to consumer spending.
In order to avoid a slowdown, the Reserve Bank of Australia (RBA) is likely to cut the official cash rate. This may mean that there is only around a 0.05% pass through to mortgage holders from the banks (depending on what other banks choose to do) but it’s still better than a rate hike.
The case for the RBA to cut rates further was already in place – growth at 2% is well below trend, inflation is benign and the Australian dollar is still too high. The contribution to growth from housing looks like topping out next year with a slowdown in Sydney’s property market and housing investor lending. The bank move to raise mortgage rates for all borrowers’ means a rate cut (at the end of the year or early next year) is on the horizon.
2. The US and Fed rate hikes
The start of a tightening cycle in US official interest rates is often associated with market volatility. Fortunately, the Fed has not blindly increased rates and has signalled it is aware of global risks and the impact of this on US inflation.
In fact, with US growth looking like it’s continuing to trend around 2-2.25% and inflationary pressures still very weak, the first Fed rate hike looks like it will be delayed into 2016. While some fret about a US recession, the historical experience tells us this is very unlikely in the absence of significant monetary tightening and we are a long way from that.
3. US Government shutdown/debt ceiling crisis
The decision by US Congress to extend government financing to December 11 (averting an October 1 shutdown) means the issue will now come up again later this year when it will get rolled into the need to raise the debt ceiling. A decision should be reached around November 5. While a shutdown or debt ceiling crisis is likely to be avoided, expect nervousness around this time.
4. Spain’s general election
With Greece ’settled’ for now and the Catalonian election not really advancing their independence from Spain, the next big risk on the horizon in Europe is Spain’s general election later this year. The populist Eurosceptic party Podemos has lost support but polling points to an inconclusive result between the Governing Popular Party and the centre left Socialist Workers Party. However, most of the heavy lifting on reforms has already been done. So a Euro-threatening outcome is unlikely.
What does this mean for investment markets?
- Shares are unlikely to continue going up in a straight line and October may yet see a bit of short-term volatility. Shares are now starting to break up out of the ranges they have been in since their falls in August in a sign that the cyclical bull market in shares is resuming. More fundamentally, shares are cheap relative to bonds and monetary conditions are set to remain easy. This in turn should help see the global economic recovery continue; and investor sentiment remains so negative that it’s actually positive from a contrarian perspective. As such, despite lingering near-term concerns regarding China and the Fed, share markets are likely resuming a broad rising trend.
- In Australia, while mining exposed parts of the country are struggling, non-mining sectors like housing, consumer spending, tourism, agriculture and higher education are benefiting from lower interest rates and the fall in the Australian dollar. We continue to see better opportunities in global shares, but the ASX200 should make it back to 5500 by year-end.
- Low bond yields point to soft medium term returns from bonds, although the recent share market downswing which saw bonds rally provides a reminder that government bonds remain a great portfolio diversifier.
- Property and infrastructure assets are likely to see ongoing support from the search for yield. Higher-yield assets should do well over the medium term helped by low bond yields.
Outlook for Australian dollar
In the short term, the Australian dollar is taking its lead from the swing back in investor risk tolerance and so looks like it’s on its way into the mid-high $US0.70s. However, the broad trend is likely to remain down as the Fed is still likely to raise interest rates sometime in the next six months. We expect to see the Australian dollar fall to $US0.60 over the coming year.
About the author
Head of Investment Strategy and Economics and Chief Economist at AMP Capital, Shane is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.