2017 – a list of lists regarding the macro investment outlook

Despite a terrible start to the year and a few political surprises along the way, 2016 saw good returns for diversified investors who held their nerve. Balanced super funds had returns around 7.5%, which is pretty good given inflation was just 1.5%. 2017 is commencing with less fear than seen a year ago but there is consternation regarding Donald Trump’s policies, political developments in Europe and the growth outlook. This note provides a summary of key insights on the global investment outlook and key issues around it in simple dot point form.

 

NINE RULES FOR INVESTORS TO KEEP IN MIND

Due to an obsession with Taylor Swift and then The Carpenters I decided I needed to have a Carpenters’ CD with the full Burt Bacharach medley they performed in the early 1970s. So I went to Amazon and found that it was only on a Japanese Carpenters’ Anthology CD which would set me back $US150 from the US or $65 for a “very good” second hand edition from Japan. The last time I got a “very good” second hand Elvis book from Amazon it had some pages missing but I decided to give the Japanese CD a go.

PUTTING RECENT SHARE MARKET FALLS IN CONTEXT

Uncertainties regarding the emerging world and specifically China and the US Federal Reserve’s much talked about first interest rate hike have continued to result in volatile share markets over the last few weeks even though most have not made new lows for this downturn.

HOW SERIOUS IS THE THREAT FROM THE EMERGING WORLD?

Whenever there are sharp falls in share markets like recently, there is a temptation to wonder whether we are seeing a re-run of the last major crisis. Fortunately, the conditions today are very different to the run-up to the global financial crisis (GFC) which originated in the developed world, notably the US. The developed world hasn’t seen the sort of excesses that preceded the GFC: there has been no generalised bubble in investment spending (housing or otherwise), there has been no asset bubble, there has been no easing in lending standards like that which occurred with sub-prime debt and there has been no build up in inflation pressures or monetary tightening. So it’s hard to see the sort of unravelling in global financial markets that started in interbank lending and credit markets, threatening a seizing up of the global financial system and spreading through all growth assets that we saw through the GFC.

 

THE AUSTRALIAN ECONOMY STILL SOFT – MORE HELP FROM THE RBA AND THE $A WILL BE NEEDED

The Australian economy remains in a difficult period as the mining boom unwinds. Non-mining activity has bounced back but is far from strong enough to offset the headwinds coming from the mining downturn. This note looks at the outlook for growth, interest rates, profits and what it means for investors.

SHARES AND GLOBAL GROWTH WORRIES

The turmoil in global investment markets has continued into this week, although the last few days have seen a bit of stabilisation and improvement in several markets. From their highs to their recent lows major share markets have now had the following falls: Chinese shares -43%, Asian shares (ex Japan) -23%, emerging markets -22%, Eurozone shares -18%, Australian shares -16%, Japanese shares -15% and US shares -12%. Such falls are painful for investors. This note looks at some of the main issues.

FIVE REASONS WHY THE RBA WILL PROBABLY CUT INTEREST RATES AGAIN

As widely expected the RBA left interest rates on hold at their August Board meeting. While it appears to retain an easing bias with its assessment that growth is “below longer-term averages” and that the economy is likely to have “a degree of spare capacity for some time yet”, it appeared to soften this bias by removing its previous reference to a further fall in the $A seeming “both likely and necessary”

THE AUSTRALIAN DOLLAR DOING WHAT IT NORMALLY DOES

Since its 2011 high, the Australian dollar has fallen 34% in value against the US dollar. For some time our view has been that it will fall to $US0.70 by year end with probably an overshoot into the $US0.60s. However, as we all know forecasting precise currency levels is a mug’s game. The key is that the direction remains down and we are likely to see a classic overshoot. This note looks at why and what it means for investors.

CHINA’S SHARE MARKET VOLATILITY

It seems western commentators can always find something to worry about regarding China. Last year it was shadow banking and the property market. Lately it’s been the sharp rise and pullback in its share market. The latter has indeed been severe – with a 32% fall over 3 and a half weeks. There have been many headlines regarding the share market volatility and efforts to stabilise the market. This note looks at the key issues.

GREECE AFTER THE “NO” VOTE

I am now getting very wary about going on holidays because invariably markets hit a rough patch whenever I do. That has certainly been the case over the past week with both a sharp pull back in Chinese shares and an intensification of uncertainty regarding Greece.

Two weeks ago it looked like Greece was heading for a deal with its creditors. Then at the last minute Greece’s Prime Minister, Alexis Tsipras, decided he didn’t like what was on offer from the Eurozone, the IMF and the ECB and called a referendum on it. This has seen Greece miss a June 30 €1.5bn payment to the IMF (which the IMF so far has called being in “arrears” albeit a declaration of “default” is likely by the end of July) and its banks shut with limits on ATM withdrawals (as Greeks have naturally been taking their money out for fear their deposits will be redenominated into a less valuable currency than the Euro) and on the verge of insolvency if something is not resolved soon.

The referendum has now been held and the No vote has won, with roughly a 60% of the vote. This note provides an update on what it means and the key things to focus on regarding Greece.