After a strong 2017/18 financial year, international shares rose 7.4% over the September quarter. This was partly due to a weakened Australian dollar, which saw Australian shares gain only 1.5% over the period. The Australian bond market recorded a more moderate result, returning 0.5% which was roughly in line with cash.
US economic growth exceeded 4% (annualised), which is remarkable at this point in the cycle, and unemployment remains at historic lows. Importantly, inflation remains low at around 2% and there is little sign that it will increase significantly anytime soon. The US share market hit a new high over the quarter. This was despite stocks in Facebook, Amazon, Apple, Netflix and Google dipping early in the quarter. Since the end of the September quarter, share markets have had a difficult time as investors are cautious of higher US interest rates and increased tensions between the US and China on trade tariffs.
The US Federal Reserve is expected to continue to raise interest rates next year, but the path will depend on employment, inflation and consumer spending conditions.
Fundamentals in other key markets also remain strong. Eurozone indicators point to further economic growth and the European Central Bank remains positive on the outlook for the region. Growth of the Chinese economy slowed slightly, but at more than 6% p.a. is still one of the fastest growing economies in the world.
Far from cooling down, the trade tensions between China and the US seem to have escalated during the quarter. New tariffs were announced by both countries and the next round of trade talks called off. The dispute appears to have some way to go before being settled, so it may continue to cause instability in Asian share markets. It’s worth noting that despite the rhetoric most investors consider the tariffs implemented so far to represent a relatively minor impact to each economy. Rather, it is the potential for far more powerful tariffs and other trade-restrictive measures which continue to weigh on investors’ minds.
Also attracting attention was the worsening crisis in Turkey. The world’s fourteenth largest economy has been looking unsteady for a while now, and the quarter saw the value of the Turkish lira plummet. Financial instability and government issues are key drivers of the crisis. Investors have grown increasingly wary of Turkey’s high current account deficit (which like all deficits, must be funded), and President Erdogan’s response to market movements has failed to instil confidence. The appointment of his son-in-law Berat Albayrak as finance and treasury minister spooked markets, and called into question the independence of the central bank. Turkey also found itself in a trade quarrel with the US, adding to pressure on its balance of payments.
The Australian economy remains sound, with unemployment hitting a new low of 5.3% and the Reserve Bank of Australia keeping interest rates on hold. Notwithstanding any unexpected rate hikes or cuts (the RBA is expected to keep rates on hold well into 2019), the issues on investors’ minds include the path of US interest rates (which affect Australian banks’ cost of funding), as well as the housing market which has continued to show signs of weakness in Sydney and Melbourne after years of tremendous gains. The aftermath of the Financial Services Royal Commission may also place significant pressure on banks to decrease the amount of lending and be more restrictive on who they lend to, which in turn can impact negatively on the construction industry as fewer houses get built.
Despite these risks to the Australian economy, overall it remains robust and continues to grow which provides support for the Australian share market over the next 12 months.
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