Markets proved interesting again in March with volatility continuing and global share markets weaker overall. For Australian investors, global share market returns were assisted by a weakening Australian dollar (AUD), which was down a little over 1% against the US dollar and by nearly 3% against the British pound. The Australian share market underperformed compared to international share markets, returning -3.8% with weakness across all sectors. The silver lining in March was listed property and fixed income with the Australian bond market returning +0.8% and listed property markets up 4.8%.
The global economy and politics
Economic indicators remained strong in March, however the release of this information was largely overshadowed by geopolitical and policy developments. Nonetheless, among key headlines was the US Federal Reserve (the Fed) raising interest rates by 0.25% to a range of 1.5% to 1.75%. Both the Fed and markets are suggesting another two increases this calendar year and possibly two or three next year, depending on inflation. The concern for many is that markets will be surprised if the Fed raises interest rates more than expected, which the Fed will be reluctant to do if it puts unnecessary pressure on the economy.
The headlines which attracted the most attention throughout the month were trade tensions between the US and China and allegations that user data had been improperly handled by Facebook.
Trade tensions between the US and China have been a consistent concern for markets, mainly because the tariffs announced for steel and aluminium may signal an increase of such practices into other industries by the US. There is also concern that this may lead to an increasingly potent response from China i.e. a ‘trade war’, with China already placing tariffs on specific goods imported into China from the US.
Tariffs are typically used by governments to protect specific industries from foreign competition, often when it is perceived that international competitors have some sort of unfair advantage. While tariffs can be beneficial in the short term they are generally considered to do more harm than good in the long term.
One of the main disadvantages of tariffs and other tools governments use to protect certain industries (e.g. subsidies) is that they can promote industries that are not competitive. In isolated cases these practices can be beneficial (for example increasing local employment) and are closely aligned to Trump’s ‘America first’ stance. The concern for markets is that if these practices are used more widely there may be a negative effect on the global economy.
Australia has been excluded from these US tariffs, but Australian businesses could be affected as China is one of our key trading partners. The US/China trade negotiations are likely to remain in the headlines for some time, but at this stage there is still hope for a peaceful settlement rather than a full-blown trade war.
News about Facebook always attracts interest but March saw them attract attention for the wrong reasons. Facebook shares performed well below the US share market index (S&P 500) during March as allegations of improper handling of data raised significant consumer privacy issues (see chart below).
The allegations are important to Facebook users and shareholders as well as the wider technology sector which is also trusted with vast amounts of personal data. Data security and privacy is likely to remain at the front of investors’ minds for some time to come.
Despite the recent weakness in share markets, economic fundamentals remain strong, particularly in the US where corporate profits continue to improve. However, geopolitical risks remain and are bound to flare up from time to time creating more share market volatility than that seen in 2017. This month markets have been shaken by trade tensions (US/China) and company specific issues (Facebook) but other issues also remain in the background e.g. North Korea. Importantly, although issues of this nature are concerning, they can also create opportunities for our portfolio to grow, for example by buying good stocks at a cheaper price. In these markets, diversification becomes key to limiting capital losses whilst also capturing opportunities to improve returns.
1 Source: Bloomberg Finance L.P. Past performance should not be regarded as an indication of future performance.
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