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The threat of war with North Korea- Implications for investors

Posted On:Aug 15th, 2017     Posted In:Rss-feed-oliver    Posted By:Provision Wealth
Introduction

Tensions with North Korea have been waxing and waning for decades now but in recent times the risks seem to have ramped up dramatically as its missile and nuclear weapon capabilities have increased. The current leader since 2011, Kim Jong Un, has launched more missiles than Kim Il Sung (leader 1948-1994) and Kim Jong Il (1994-2011) combined.

Source: CNN, AMP Capital

The

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Introduction

Tensions with North Korea have been waxing and waning for decades now but in recent times the risks seem to have ramped up dramatically as its missile and nuclear weapon capabilities have increased. The current leader since 2011, Kim Jong Un, has launched more missiles than Kim Il Sung (leader 1948-1994) and Kim Jong Il (1994-2011) combined.

Source: CNN, AMP Capital

The tension has ramped up particularly over the last two weeks with the UN Security Council agreeing more sanctions on North Korea and reports suggesting North Korea may already have the ability to put a nuclear warhead in an intercontinental ballistic missile that is reportedly capable of reaching the US (and Darwin).

US President Trump also threatened North Korea with “fire, fury and, frankly, power” only to add a few days later that that “wasn’t tough enough” and “things will happen to them like they never thought possible” and then that “military solutions…are locked and loaded should North Korea act unwisely”. Meanwhile, North Korea talked up plans to fire missiles at Guam before backing off with Kim Jong Un warning he could change his mind “if the Yankees persist in their extremely dangerous reckless actions”. 

This is all reminiscent of something out of James Bond (or rather Austin Powers) except that it’s serious and naturally has led to heightened fears of military conflict. As a result, share markets dipped last week and bonds and gold benefitted from safe haven demand, although the moves have been relatively modest and markets have since bounced back.

At present there are no signs (in terms of military deployments, evacuation of non-essential personnel, etc) that the US is preparing for military conflict and it could all de-escalate again, but given North Korea’s growing missile and nuclear capability it does seem that the North Korean issue, after years of escalation and de-escalation, may come to a head soon. It’s also arguable that the volatile personalities of Kim Jong Un and Donald Trump and the escalating war of words have added to the risk of a miscalculation – eg where North Korea fires a missile into international waters, the US seeks to shoot it down, which leads to a cycle of escalating actions. This note looks at the implications for investors.

Shares and wars (or threatened wars)

Of course there have been numerous conflicts that don’t even register for global investors beyond a day or so at most if at all. Many have little financial market impact because they are not seen as having much economic impact (eg the war in Afghanistan in contrast to 1991 and 2003 wars with Iraq, which posed risks to the supply of oil). As such, I have only focussed on the major wars/potential wars since World War 2 and only on the US share market (S&P 500) as it sets the direction for others (including European, Asian and Australian shares).

  • World War 2 (September 1939-September 1945) – US shares fell 34% from the outbreak of WW2 in September 1939, with 20% of this after the attack on Pearl Harbour, and bottomed in April 1942. This was well before the end of WW2 in 1945. Six months after the low, shares were up 25% and by the time WW2 had risen by 108%.

  • Korean War (June 1950-July 1953) – US shares initially fell 8% when the war started but this was part of a bigger fall associated with recession at the time. Shares bottomed well before the war ended and trended up through most of it.

  • Vietnam War (1955-1975) – For most of this war US shares were in a secular bull market but with periodic bear markets on mostly other developments. Rising inflation and a loss of confidence associated with losing the Vietnam war may have contributed to the end of the secular bull market in the 1970s – but the war arguably played a small role in this.

  • Cuban Missile Crisis (October 1962) – Shares initially fell 7% over eight days as the crisis erupted but this was part of a much bigger bear market at the time. They bottomed five days before it was resolved and then rose sharply. This is said to be the closest the world ever came to nuclear war 

  • Iraq War I (August 1990-January 1991) – Shares fell 11% from when Iraq invaded Kuwait to their low in January 1991 but again this was part of a bigger fall associated with a recession. Shares bottomed 8 days before Operation Desert Storm began and 19 days before it ended and rose sharply.

  • Iraq War II (March-May 2003) – Shares fell 14% as war loomed in early 2003 but bottomed nine days before the first missiles landed and then rose substantially although again this was largely due to the end of a bear market at the time.


 Source: AMP Capital


 The basic messages here are that:

  • Shares tend to fall on the initial uncertainty but bottom out before the crisis is resolved (militarily or diplomatically) when some sort of positive outcome looks likely; 

  • Six months after the low they are up strongly; and

  • The severity of the impact of the war/threatened war on shares can also depend on whether they had already declined for other reasons. For example, prior to World War 2, the Cuban Missile Crisis and the two wars with Iraq, shares had already had bear markets. This may have limited the size of the falls around the crisis.

Possible scenarios 

In thinking about the risks around North Korea, it’s useful to think in terms of scenarios as to how it could unfold:

  1. Another round of de-escalation – With both sides just backing down and North Korea seemingly stopping its provocations. This is possible, it’s happened lots of times before, but may be less likely this time given the enhanced nature of North Korea’s capabilities.

  2. Diplomacy/no war – Sabre rattling intensifies further before a resolution is reached. This could still take some time and meanwhile share markets could correct maybe 5-10% ahead of a diplomatic solution being reached before rebounding once it becomes clear a peaceful solution is in sight. An historic parallel is the Cuban Missile Crisis of 1962 that saw US shares fall 7% and bottom just before the crisis was resolved, and then stage a complete recovery. 

  3. A brief and contained military conflict – Perhaps like the 1991 and 2003 Iraq wars proved to be, but without a full ground war or regime change. In both Iraq wars while share markets were adversely affected by nervousness ahead of the conflicts, they started to rebound just before the actual conflicts began. However, a contained Iraq-style military conflict is unlikely given North Korea’s ability to launch attacks against South Korea (notably Seoul) and Japan.

  4. A significant military conflict – If attacked, North Korea would most likely launch attacks against South Korea and Japan causing significant loss of life. This would entail a more significant impact on share markets with, say, 20% or so falls (more in Asia) before it likely becomes clear that the US would prevail. This assumes conventional missiles – a nuclear war would have a more significant impact.

Of these, diplomacy remains by far the most likely path. The US is aware of the huge risks in terms of the likely loss of life in South Korea and Japan that would follow if it acted pre-emptively against North Korea and it retaliates, and it has stated that it’s not interested in regime change there. And North Korea appears to only want nuclear power as a deterrent. In this context, Trump’s threats along with the US show of force earlier this year in Syria and Afghanistan are designed to warn North Korea of the consequences of an attack on the US or its allies, not to indicate that an armed conflict is imminent. Rather, comments from US officials it’s still working on a diplomatic solution. As such, our base case is that there is a diplomatic solution, but there could still be an increase in uncertainty and share market volatility in the interim. Key dates to watch are North Korean public holidays on August 25 and September 9, which are often excuses to test missiles, and US-South Korean military exercises starting August 21.

Correction risks

The intensification of the risks around North Korea comes at a time when there is already a risk of a global share market correction: the recent gains in the US share market have been increasingly concentrated in a few stocks; volatility has been low and short-term investor sentiment has been high indicating a degree of investor complacency; political risks in the US may intensify as we come up to the need to avoid a government shutdown and raise the debt ceiling next month, which will likely see the usual brinkmanship ahead of a solution (remember 2013); market expectations for Fed tightening look to be too low; tensions may be returning to the US-China trade relationship; and we are in the weakest months of the year seasonally for shares. While Australian shares have already had a 5% correction from their May high, they are nevertheless vulnerable to any US/global share market pull back. 

However, absent a significant and lengthy military conflict with North Korea (which is unlikely), we would see any pullback in the next month or so as just a correction rather than the start of a bear market. Share market valuations are okay – particularly outside of the US, global monetary conditions remain easy, there is no sign of the excesses that normally presage a recession, and profits are improving on the back of stronger global growth. As such, we would expect the broad rising trend in share markets to resume through the December quarter.

Implications for investors

Military conflicts are nothing new and share markets have lived through them with an initial sell-off if the conflict is viewed as material followed by a rebound as a resolution is reached or is seen as probable. The same is likely around conflict with North Korea. The involvement of nuclear weapons – back to weapons of mass destruction! – adds an element of risk but trying to protect a portfolio against nuclear war with North Korea would be the same as trying to protect it against a nuclear war during the Cold War, which ultimately would have cost an investor dearly in terms of lost returns. While there is a case for short-term caution, the best approach for most investors is to look through the noise and look for opportunities that North Korean risks throw up – particularly if there is a correction.

If you would like to discuss anything in this report, please call us on |PHONE|.

Source: AMP Capital 15 August 2017

Author

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital 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.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

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Inequality- is it increasing? What’s driving it? And what it means for economic growth and investors

Posted On:Aug 11th, 2017     Posted In:Rss-feed-oliver    Posted By:Provision Wealth
Introduction

The issue of rising inequality has seen increasing interest over the last year or so, particularly following the Brexit and Trump votes for which rising inequality was seen as a key driver. This is an issue we have looked at before in terms of driving a swing to the left amongst median voters in Anglo countries and contributing to a

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Introduction

The issue of rising inequality has seen increasing interest over the last year or so, particularly following the Brexit and Trump votes for which rising inequality was seen as a key driver. This is an issue we have looked at before in terms of driving a swing to the left amongst median voters in Anglo countries and contributing to a backlash against economic rationalist policies (see “The political pendulum swings to the left”, Oliver’s Insights, June 2016 (http://bit.ly/1UWCUX1) but this note takes a more detailed look at the economic and investment implications.

Is inequality rising?

Because inequality is a politically-charged issue, all sorts of numbers are thrown around with a favourite seeming to be the share of gross income going to a particular income group, say the top 1% or 10%. But this may not be the best guide because of the impact of progressive income taxes and welfare transfers. In fact, the best measure of income inequality is the Gini coefficient calculated on incomes after taxes and transfers. Basically it shows the variation between the actual distribution of income in a country and what would apply if it’s distributed perfectly equally. As such, it ranges from zero indicating perfect equality to one indicating perfect inequality with one household, or individual, receiving all income. Naturally, there is much debate about the data but the best available for global comparisons appears to be from the OECD and the Standardised World Income Inequality Database. The Gini coefficient from these sources is shown for various countries and for developed and emerging country averages in the next chart.  

Source: OECD, Standardised World Income Inequality Database, AMP Capital

As might be expected, emerging countries are less equal than advanced countries but the key point is that there has been a general trend higher in inequality during the last 30 years. This is particularly evident in the emerging world and the US, but less so in the Eurozone where it’s actually been stable since the mid-1990s. There has also been a rising trend in Australia, although its stabilised since 2008 (and the data pre 1994 is less reliable). In terms of advanced countries, the US and UK are the least equal, and Eurozone and Scandinavian countries tend to be more equal. Inequality in Australia is above the OECD average but below that in the US and UK – see the next chart. 

Data is after taxes and Welfare Transfers. Source:  OECD, SWID, AMP Capital 

With rising levels of income inequality also appears to have come an increase in wealth inequality. After falling into the 1970s, the share of wealth in the US held by the top 0.1% has increased from around 7% to over 20%.  To some degree, rising wealth inequality is not that surprising as higher income earners save a higher proportion of their income and allocate a higher proportion of their savings to growth assets (like shares and property) that have higher long-term returns than bank deposits provide. So naturally their wealth will grow faster than that of lower income earners. Easy money from central banks post the Global Financial Crisis (GFC) may have contributed to this but returns from growth assets haven’t been in excess of pre-GFC norms, and the higher unemployment that would have followed if central banks had not run easy money would have arguably resulted in a far more significant increase in inequality.

What has driven the increase in income inequality?

The rise in the level of inequality likely reflects a range of drivers:

  • The rise in the profit share of GDP from its lows around the early 1980s in developed countries (which it should be recalled was depressing economic growth at the time) likely benefitted higher income earners who derive a greater share of income from profits (via higher levels of company ownership either directly or via shares).  

  • Technological innovation has likely boosted inequality as it: boosted demand for skilled workers at the expense of unskilled workers; supplanted middle income jobs in more recent years; and has contributed to a “superstar economy” in which a few “winner-take-all” firms (and their owners) and app designers can earn super normal returns (and hence income) globally without generating the jobs and incomes that the technologies of the past might have (think Google or Facebook versus Ford or GM in their heyday).

  • Globalisation, by supplanting low income jobs in advanced countries, may have contributed to increased inequality.

  • Rapid economic development in emerging countries at a time when their progressive taxation systems are not fully developed likely benefitted higher income earners more than lower income earners in these countries, even though living standards rose across the board.

But why is it only causing angst now?

As the first chart shows, inequality has been trending up globally for many years so why has it become more of an issue lately? Prior to the GFC, rising levels of inequality were likely masked as either wages were rising solidly and/or people were able and willing to take on more debt. When your own income or at least your living standard is on the rise, you are less likely to take note of those better off than you are. But when your income growth slows and you are less able to take on more debt to make up for it, how the “better off” Jones’s are doing becomes a bigger issue.

This has been an issue for much longer in the US (with median real incomes reportedly stagnating since the early 1980s) but may be becoming an issue in Australia, too. The recent HILDA (or Household Income and Labour Dynamics in Australia report), which tracks roughly 7000 Australian households since early last decade, shows a flat Gini coefficient for its sample of households since 2001 (in contrast to the much broader measure shown in the first chart) but stagnant real median incomes since 2009 (see the next chart), suggesting it’s the weakness in incomes (made worse by record low wages growth) that’s the real issue. 

Worker insecurity post the GFC, with higher levels of underemployment and rapid workplace change partly as a result of technological disruption, is likely adding to anxiety and tension around the issue of rising inequality.


Source:  Melbourne Institute, AMP Capital
 

Angst around the issue may also be accentuated in Australia by the issue of poor housing affordability, with many millennials feeling that they are locked out of home ownership although this is perhaps more an intergenerational issue.

Why is rising inequality an issue economically and for investors?

A degree of inequality is essential in a free market economy to ensure there are incentives to be productive, invest and innovate. For example, it makes sense that wages and incomes grow faster in some usually higher skilled areas than others to encourage people to train and work in areas where there is stronger demand. However, (putting aside the debate about “fairness”) inequality that rises too high can reduce economic growth. It can do this because households with high disposable incomes save more and spend less than low income households who survive from pay day to pay day, and this will result in slower short-term economic growth. High levels of inequality can also create social tensions, which can disrupt production and investment and hence economic growth. 

Inequality may become an even bigger issue going forward as technological innovation risks concentrating income and wealth in the hands of a few global winners, which could further drive up inequality over time. So for all these reasons, inequality is an issue that governments should be interested in. 

The danger is that such a focus may lead to a return to economic policies, such as ever-higher top marginal tax rates, that discourage work effort, lead to a smaller national cake than would otherwise be the case, and a return to the worker versus boss confrontational environment that resulted in lower growth in productivity and living standards in the 1970s. This is particularly a risk in Australia where the tax system is already very progressive (with the top 10% of income earners contributing around 45% of total income tax revenue raised) and the top marginal tax rate is high by global standards. 

The risk is that rising inequality and a populist response to it help drive a shift away from rational economic policies, which ultimately leads to slower productivity growth and eventually rising inflation as the supply side of economies is damaged. Which, in turn, will contribute to constrained medium-term investment returns. So the key for governments and policy makers in seeking to address the issue of rising inequality is to get the balance right between achieving an outcome which is fair and contributes to balanced sustainable growth but not going so far as to depress incentive and productivity. 

If you would like to discuss anything in this report, please call us on |PHONE|.

Source: AMP Capital 10 August 2017

Author

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital 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.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

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The break higher in the Australian dollar is likely to be limited – this is not 2007 all over again!

Posted On:Aug 03rd, 2017     Posted In:Rss-feed-oliver    Posted By:Provision Wealth

Contrary to our expectations, the Australian dollar has recently broken out of the $US0.72 to $US0.78 range of the last 15 months or so on the upside and spiked above $US0.80, its highest in over two years. So what gives? Why has the $A broken higher? Is it an Australian dollar or US dollar story? What will be the impact

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Contrary to our expectations, the Australian dollar has recently broken out of the $US0.72 to $US0.78 range of the last 15 months or so on the upside and spiked above $US0.80, its highest in over two years. So what gives? Why has the $A broken higher? Is it an Australian dollar or US dollar story? What will be the impact on the economy?  Is it on its way to parity again or will the downtrend resume?

Drivers of the recent rebound

Domestic considerations for the Australian dollar have recently been contradictory. While readings for employment, business confidence and retail sales have been solid and the minutes from the Reserve Bank of Australia’s (RBA) last board meeting were seen by many as hawkish, consumer confidence remains weak, June quarter inflation data was soft and the RBA has sought to push back against expectations for higher interest rates and in fact indicated that a lower $A “would be helpful”. 

Rather there have been three main drivers of the recent break higher in Australian dollar: weakness in the US dollar; a rebound in commodity prices including in the iron ore price; and technical conditions, which have seen the break of the top of the $US0.72-0.78 range attracting more buying into the $A so that the rally has taken on a bit of a life of its own. 

The US dollar goes from up to down 

But the big one in here has been the downwards reversal in the US dollar that we have seen this year. While the $A is up 10% against the $US so far this year, the Euro is up 12% and the $US is down 9% against a basket of currencies. At the end of 2016, there was an expectation that President Trump’s tax and infrastructure policies would deliver a boost to US growth and that this, combined with inflation around the Fed’s 2% target, would see the Fed continue its gradual process of monetary tightening and that this would all see the US dollar trend higher. It’s all turned out a little bit different though:

  • While President Trump has not been as threatening to the global economy as some had feared (eg, no trade war with China or Mexico –at least so far), his presidency has been characterised by a high degree of mayhem with so far no passage of tax reform or infrastructure spending. In fact, he has just had another bad week: Congress has failed to reform or repeal Obamacare; it has imposed new sanctions on Russia, which can’t be eased by him; several senators warned him not to fire Attorney General Jeff Session; the Boy Scouts issued an apology for a speech he gave at a Jamboree; the military baulked at implementing his policy banning transgender people in the military; and his staff turnover accelerated. Australia’s attempt at political mayhem – with “foreigners” taking Aussie politicians jobs! – arguably pales into insignificance. We remain of the view that the Republican-controlled Congress won’t impeach Trump in relation to the Mueller inquiry (into Russian links and other things) and that tax reform will still be passed (as it’s something Republicans agree on and they need a win). However, while none of the mayhem around Trump has had much lasting impact on the US share market, as it’s benefitted from a “Goldilocks”-like combination of good growth and profits but low inflation keeping the Fed friendly, it has weighed on broader sentiment towards the US.

  • Recently, core inflation in the US has fallen back to 1.4% year on year from 1.8% earlier this year and this may slow the Fed with a September rate hike now looking like it will be delayed to December and possibly early next year.

All of this – at a time when growth in the rest of the world has proven to be a bit stronger than feared at the start of the year –has clearly weighed on the value of the US dollar. Ultimately we see the $US resuming its upswing as the US economic cycle is more advanced than in most major countries and the Fed is likely to continue monetary tightening with other countries lagging.

This is not 2007 for the $A

But returning to the Australian dollar, in a big picture sense it’s not way out of whack with long-term fair value based on relative prices or what is referred to as purchasing power parity. This can be seen in the next chart, which shows where the $A should have been over time if it had moved to equilibrate relative consumer price levels between the US and Australia. Right now, fair value on this measure is around $US0.75, so at around $US0.80 it’s hard to get too excited given that purchasing power parity is only a rough guide.


Source: RBA, ABS, AMP Capital

However, the environment today is very different than a decade ago when in March 2007 the $A burst through $US0.80, having recovered from a 2001 low of $US0.48, ultimately on its way towards parity (after an interruption from the Global Financial Crisis (GFC)). Back then: 

  • Australia’s export prices were surging on the back of 10% plus growth in China, with Chinese fixed asset investment growing around 25% per annum (pa) and industrial production growing at around 15% pa.

  • The supply of commodities was constrained by years of underinvestment in new mines and related infrastructure. 

  • The Australian economy was growing at 5% year on year and underlying inflation was 2.8% and on its way to 5%. 

  • So the RBA was raising interest rates in response at a time when US interest rates had peaked (in the very early stages of the GFC), such that the interest rate differential between Australia and the US was widening, which is normally positive for the Australian dollar.

Now the environment is very different:

  • Notwithstanding the yoyo ride in the iron ore price, the upside in commodity prices is limited by slower growth in China (with GDP growth running around 6.5-7%, fixed asset investment growing around 8.5% pa and industrial production growing around 7.5% pa).

  • The supply of commodities has surged after record levels of investment in new mines and energy projects.

  • The Australian economy is growing at less than 2% year on year. In fact, the rise in the $A is a problem for the economy and is likely contributing to the underperformance of the Australian share market this year (it’s up 1.4% year to date) compared to global shares (which are up 9.2%). With mining investment still falling, consumers under pressure and housing construction looking like it is peaking, we need a contribution to growth from trade-exposed sectors like tourism, higher education, manufacturing and farming but a rising $A will work against that. Any tourist operator who was thinking of expanding must now be fearing another run to parity is on the way, which will destroy the flow of foreign tourists and send locals back to Disneyland for their holidays. So it won’t be good for investment either.

  • Inflation is running below the RBA’s 2-3% target, and wages growth – the main driver of costs – is at record lows. And the rise in the $A at a time of already sub-par growth risks keeping inflation below target for longer.

  • As a result, the RBA is far from tightening. In fact, in its post-August meeting statement it noted that a rising $A “would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”. In other words, the rising $A is a defacto monetary tightening that will mean a lower profile for the cash rate than would otherwise have been the case. And meanwhile with US economic indicators remaining solid and the Fed is likely to continue raising rates and start reversing quantitative easing next month. So a resumption of the falling interest rate differential between Australia and the US is likely. As the next chart shows, periods of a falling official interest rate differential between Australia and the US usually see a falling Australian dollar (see black arrows) – not in a straight line, but over time. By contrast surges in the value of the $A (eg 2007-2008 and 2009-2011 – both circled) are associated with rising rates in Australia relative to the US and there is no sign of that.


Source: Bloomberg, AMP Capital

The huge difference between the Australian and US economies at present can be seen in broad measures of labour market underutilisation. In Australia, the combination of unemployment and underemployment is about as high as it ever gets, whereas in the US its nearing as low as it ever gets, which is consistent with falling interest rates in Australia relative to the US. Back in 2007, when the $A was on its way towards parity, the Australian labour market was rapidly tightening with labour market underutilisation heading to a record low.

Source: Bloomberg, AMP Capital

The bottom line

In the short term, the $A could still have more upside as the break up through key points of technical resistance could still attract more buying into it. But this is not 2007 and in fact is very different. The decade-long commodity price boom is long gone and the Australian economy is underperforming. So I remain of the view that at some point in the next year the $A will fall back – probably below $US0.70 – but trying to get a handle on when that will be and from what level is not so easy.

For investors, this means there remains a strong case to maintain a decent exposure to offshore assets that are not hedged back to Australian dollars as they will go up in value if the $A falls. This has the added advantage that if we go through another global growth scare, which will invariably weigh on the $A, it will provide a useful hedge for Australia-based investors.  

If you would like to discuss anything in this report, please call us on |PHONE|.

 

Source: AMP Capital 2 August 2017

Author

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital 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.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

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Five great charts on investing

Posted On:Jul 25th, 2017     Posted In:Rss-feed-oliver    Posted By:Provision Wealth

Investing is often seen as complicated. And this has been made worse over the years by the increasing complexity in terms of investment products and choices, regulations and rules around investing, the role of the information revolution and social media in amplifying the noise around investment markets and the expanding ways available to access various investments. But at its core,

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Investing is often seen as complicated. And this has been made worse over the years by the increasing complexity in terms of investment products and choices, regulations and rules around investing, the role of the information revolution and social media in amplifying the noise around investment markets and the expanding ways available to access various investments. But at its core, the basic principles of successful investing are simple. And one way to demonstrate that is in charts or pictures – after all, a picture tells a thousand words. So this note looks at five charts I find useful in understanding investing. I’ll put out part 2 – another five great charts on investing – in a few weeks’ time.

Chart 1: The power of compund interest

This chart is my absolute favourite. My good friend, the well-known economist Dr Don Stammer, has said there are six things we owe our children or grandchildren: a sense of humour; a reasonable education; an early understanding of the magic of compounding; an awareness the cycle lives on; some help when they buy their first house or apartment; and a feeling of optimism. I can’t argue with the first, second and fifth, the fourth I will deal with next, and a feeling of optimism is essential if you wish to succeed as an investor. But on compound interest – he’s right it is like magic!


Source: Global Financial Data, AMP Capital

The chart shows the value of $1 invested in various Australian assets in 1900 allowing for the reinvestment of dividends and interest along the way. That $1 would have grown to $231 if invested in cash, to $850 if invested in bonds and to $485,815 if invested in shares. While the average return since 1900 is only double that in shares relative to bonds, the huge difference between the two at the end owes to the impact of compounding or earning returns on top of returns. So any interest or return earned in one period is added to the original investment so that it all earns a return in the next period. And so on.

The “Law of 72” is a useful tool to understanding how long it takes an investment to double in value using compounding. Just divide the rate of return into 72 and that’s the answer (roughly). For example, if the rate of return is 2% per annum (eg, the interest rate on a bank term deposit), it will take 36 years to double in value (= 72 divided by 2). But if it’s, say, 8% pa (eg, the expected total return from shares including dividends), then it will take just 9 years (= 72 divided by 8). Key message: if we want to grow our wealth, we must have exposure to growth assets like shares and property.

Chart 2: The cycle

But of course shares can have lots of setbacks along the way as is particularly evident during the periods highlighted by the arrows on the share market line. In fact, the higher returns shares generate over time relative to cash and bonds is compensation for the periodic setbacks that they suffer from. But understanding those periodic setbacks – that there will always be a cycle – is important in not getting blown away from the higher returns that shares and other growth assets provide over time. The next chart shows a stylised version of the investment cycle.


Source: AMP Capital

The grey line shows the economic cycle from “boom” to “bust” to “boom” again. Prior to the low point in the economic cycle, shares invariably find a bottom thanks to attractive valuations and easy monetary policy and as smart investors look forward to an eventual economic recovery. This phase is usually characterised by scepticism as economic conditions are yet to improve. Shares then move higher, eventually supported by stronger earnings on the back of improving economic conditions, which eventually gives way to a blow off phase or euphoria as investors pile in. This is ultimately brought to an end as rising inflation flowing from strong economic conditions results in ever-tightening monetary policy, which combines with smart investors anticipating an economic downturn and results in shares coming under pressure. Usually around the top of the cycle real assets – like property and infrastructure – are a better bet than shares as they benefit from strong real economic conditions. But once the downturn hits bonds are the place to be as slowing growth eventually gives way to falling inflation allof which sees bond yields decline producing capital gains for investors. At some point, of course, easing monetary conditions and attractive valuations see shares bottom out and the whole cycle repeats.

Key message: cycles are a fact of life and while they don’t repeat precisely, it’s invariably the case that the share market leads the economic cycle (bottoming out before economic recovery is clear and topping out before an economic downturn has really hit) and that different assets perform relatively best at different phases in the cycle.

Chart 3: The roller coaster of investor emotion

The swings we see in investment markets are far greater than can be justified by movements in investment fundamentals alone – ie profits, dividends, rents, interest rates, etc. In fact, investor emotion plays a huge part. The next chart shows the roller coaster that investor emotion traces through the course of an investment cycle. A bull market runs through optimism, excitement, thrill and ultimately euphoria by which point the asset class is over loved (and usually overvalued too) – everyone who is going to buy has – and it becomes vulnerable to bad news. This is the point of maximum risk. Once the cycle starts to turn down in a bear market, euphoria gives way to anxiety, denial, fear, capitulation and ultimately depression at which point the asset class is under loved (and usually undervalued) – everyone who is going to sell has – and it becomes vulnerable to good (or less bad) news. This is the point of maximum opportunity. Once the cycle turns up again, depression gives way to hope, relief and optimism before eventually moving on to euphoria again.

The roller coaster of investor emotion


Source: Russell Investments, AMP Capital

Key message: investor emotion plays a huge roll in exaggerating the investment cycle. The key for investors is not to get sucked into this emotional roller coaster: avoid assets where the crowd is euphoric and convinced it’s a sure thing and the asset is over loved, and favour assets where the crowd is depressed and the asset is under loved.

Chart 4: The wall of worry

It seems that these days there is always something for investors to worry about. This year so far has been no exception with numerous worries about President Trump on multiple fronts (will he overstimulate the US economy? will he cause trade wars? will he deliver on his pro-business policies? will he be impeached? etc), various terrorist attacks, elections in the Netherlands and France and worries about Italy, the surprise election result in the UK, tensions between Saudi Arabia and Qatar, a new plunge in the oil price, intensifying “provocations” from North Korea, ongoing worries about the Australian property market and banks, etc. But most of this stuff is just noise. The global economy has had plenty of worries over the last century, but it got over them with Australian shares returning 11.8% per annum since 1900, with a broad rising trend in the All Ords price index as can be seen in the next chart, and US shares returning 9.8% pa. (Note that this chart shows the All Ords share price index whereas the first chart shows the value of $1 invested in the All Ords accumulation index, which allows for changes in share prices and dividends.)


Source: ASX, AMP Capital

Key message: worries are normal around the economy and investment markets but most of them are just noise.

Chart 5: Time is on your side

Investment markets bounce all over the place in the short term. As can be seen in the next chart even annual returns in the share market are highly volatile, but longer-term returns tend to be solid and relatively smooth. Since 1900 for Australian shares roughly two years out of ten have had negative returns but there are no negative returns over rolling 20-year periods. (It’s roughly three years out of ten for US shares since 1900.


Source: Global Financial Data, AMP Capital

Key message: the longer the time horizon, the greater the chance your investments will meet their goals. So in investing, time is on your side.

If you would like to discuss anything in this article, please call us on |PHONE|.

 

Source: AMP Capital 25 July 2017

Author
Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital 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.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

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2016-17 saw strong returns for diversified investors – here are five reasons why returns are likely to be solid in 2017-18

Posted On:Jul 18th, 2017     Posted In:Rss-feed-oliver    Posted By:Provision Wealth

The past financial year turned out far better for investors than had been feared a year ago. This was despite a lengthy list of things to worry about: starting with the Brexit vote and a messy election outcome in Australia both just before the financial year started; concerns about global growth, profits and deflation a year ago; Donald Trump being

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The past financial year turned out far better for investors than had been feared a year ago. This was despite a lengthy list of things to worry about: starting with the Brexit vote and a messy election outcome in Australia both just before the financial year started; concerns about global growth, profits and deflation a year ago; Donald Trump being elected President in the US with some predicting a debilitating global trade war as a result; various elections across Europe feared to see populists gain power; the US Federal Reserve resuming interest rate hikes; North Korea stepping up its missile tests; China moving to put the brakes on its economy amidst ever present concern about its debt levels; and messy growth in Australia along with perennial fears of a property crash and banking crisis. Predictions of some sort of global financial crisis in 2016 were all the rage. But the last financial year provided a classic reminder to investors to turn down the noise on all the events swirling around investment markets and associated predictions of disaster, and how, when the crowd is negative, things can surprise for the better. But will returns remain reasonable? After reviewing the returns of the last financial year, this note looks at the investment outlook for the 2017-18 financial year.

A good year for diversified investors

The 2016-17 financial year provided strong returns for diversified investors. Of course cash and bank term deposits continued to provide poor returns and a backup in bond yields, as deflation and global growth fears faded, resulted in poor returns from bonds and investments that are sensitive to rising bond yields such as real estate investment trusts. But improving global growth and profits along with still easy monetary policy buoyed share markets with global shares continuing to outperform Australian shares. And real assets like unlisted (or direct) commercial property, infrastructure and Australian residential property continued to perform well, although there was a huge range across Australia in terms of the latter with Perth depressed and Sydney and Melbourne still booming.

click to enlarge 2016-17 - major asset class returns

Source: Thomson Reuters, AMP Capital

As a result, balanced growth superannuation funds returned around 10% after fees and taxes over 2016-17, in contrast to depressed returns of around 2% in 2015-16. Interestingly, such funds returned around 10% pa over the last five years as well reflecting favourable asset class returns partly in response to a recovery from the 2010-12 Eurozone sovereign debt crisis.

Key lessons for investors from the last financial year

These include:

  • Turn down the noise – despite lots of worries and predictions of disaster shares did well.

  • Maintain a well-diversified portfolio – despite previous strongly-performing asset classes like bonds real estate investment trusts having a tougher time, a well-diversified portfolio benefitted from a rebound in share markets.

  • Be cautious of the crowd – a year ago the crowd was pretty negative and as is often the case it turned out to be wrong.

  • Cash is not king – while cash and bank deposits provided safe steady returns, they were also very low returns.

Five reasons why returns are likely to remain solid

Of course, there will be the usual corrections and bumps along the way. However, there are five reasons to be upbeat about the overall return outlook for the year ahead.

  • First, global growth is solid. Business conditions indicators – such as surveys of purchasing managers (Purchasing Managers Indexes or PMIs) – are strong and at levels consistent with good global growth. 

Global Business conditions

Source: Bloomberg, AMP Capital

  • In Australia, growth is unlikely to be fantastic as housing slows and the consumer is constrained but it should still be okay as the big drag from falling mining investment is abating and the contribution to growth from trade is set to remain solid as resources projects complete.

  • Second, solid global growth should continue to underpin a recovery in corporate profits after a weak patch into 2016.

  • Third, there are minimal signs globally of the broad-based excess – in terms of capacity utilisation, growth in debt, investment, wages growth and inflation or asset prices – that normally presage a peak in the growth cycle. Sure, there have been pockets of excess – corporate debt growth has been arguably too strong in the US and China, and the Sydney and Melbourne property markets have been too hot – but they have not been broad based, unlike the share boom and tech related investment into say 2000.

  • Fourth, because of low inflationary pressures, global monetary tightening will likely remain very gradual and monetary policy will likely remain easy for some time to come. There is a risk that the next Fed rate hike won’t occur until 2018, the ECB’s exit from ultra easy monetary policy will likely be very slow, the RBA is still some time away from tightening and Bank of Japan tightening is likely years away.

  • Finally, share valuations are not excessive. While price to earnings ratios are a bit above long-term averages, this is not unusual for a low inflationary environment. Valuation measures that allow for low interest rates and bond yields show shares to no longer be as cheap as a year ago but they are still not expensive, particularly outside of the US.

What about the return outlook?

After the strong overall investment returns seen over last year, some slowing is likely in the year ahead. Share markets are no longer universally cheap and the crowd is not as negative as a year ago. However, putting short-term worries and uncertainties aside, with reasonable economic and profit growth, continuing relatively easy monetary policy and some asset classes still benefitting from a chase for yield, returns from a well-diversified portfolio are likely to be reasonable this financial year – but more like 7% as opposed to 10%. Looking at the major asset classes:

  • Cash and term deposit returns are likely to remain poor at around 2%. Investors are still under pressure to decide what they really want: if it’s complete capital stability then stick with cash or if it’s a decent stable income flow then consider the alternatives with Australian shares and real assets such as unlisted commercial property likely to continue to offer more attractive yields than bank deposits.

Aust shares still offering better yeild than bank deposits

Source: RBA, AMP Capital

  • Still ultra-low sovereign bond yields and a likely gradual rising trend in yields, which will result in capital losses, are likely to result in another year of poor returns from bonds.

  • Corporate debt should provide okay returns. A drift higher in sovereign bond yields is a mild drag but with continued modest global growth the risk of default should remain low.

  • Unlisted commercial property and infrastructure are likely to benefit from the ongoing “search for yield” (although this may slow a bit) and solid economic growth.

  • Residential property returns are likely to be mixed with Sydney and Melbourne slowing, Perth and Darwin bottoming and other cities providing modest gains. Very low rental yields are not good, particularly in oversupplied units.

  • Expect a potential share market correction in the seasonally weak period out to October, but the rising trend in shares is likely to continue as shares are okay value, monetary conditions are likely to remain relatively easy (albeit becoming less so) and continuing reasonable economic growth should help profits. We continue to favour global shares (particularly outside the US) over Australian shares.

  • Finally, while the $A has proved far more resilient than I expected and may push up into the low $US0.80s in the short term, the downtrend in the $A is likely to resume at some point in the next 12 months enhancing the case for unhedged global shares.

Things to keep an eye on

The key things to keep an eye on over the year ahead are:

  • Global business conditions PMIs – these currently point to good, but not booming, growth.

  • Risks around President Trump – we see Congress passing tax reform but there’s a risk the noise around Trump will overwhelm.

  • The US Federal Reserve’s likely winding down of its balance sheet (reversing quantitative easing) along with a possible transition to a new Fed Chair could cause volatility.

  • The Italian election due by May 2018 could reinvigorate Eurozone break up fears.

  • The European Central Bank is likely to slow its monetary stimulus next year.

  • North Korean risks could escalate.

  • The Sydney and Melbourne property markets – where a sharp downturn (which is not our view) could threaten Australian growth.

Concluding comments

This financial year will likely see the usual worry list and bouts of volatility and returns may slow from 2016-17, but the combination of reasonable global growth, solid profit growth and still easy monetary conditions suggest solid returns for diversified investors.

Source: AMP Capital 18 July 2017

Author: Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital 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.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

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From goldilocks to taper tantrum 2.0 – a bit of turbulence hits markets. 3 reasons not to be fussed.

Posted On:Jul 05th, 2017     Posted In:Rss-feed-oliver    Posted By:Provision Wealth

For much of this year, there has been a surprising divergence between share and bond markets with shares up in response to improving growth and bond yields down in response to weak inflation. Some feared that either bonds or equities had it wrong, but in a way it seemed like Goldilocks all over again – not too hot (ie benign

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For much of this year, there has been a surprising divergence between share and bond markets with shares up in response to improving growth and bond yields down in response to weak inflation. Some feared that either bonds or equities had it wrong, but in a way it seemed like Goldilocks all over again – not too hot (ie benign inflation) but not too cold (ie good growth). However, the past week or so has seen a sharp back up in bond yields – mainly in response to several central banks warning of an eventual tightening in monetary policy. Over the last week or so, 10 year bond yields rose 0.2-0.3% in the US, UK, Germany and Australia. This may not seem a lot but when bond yields are this low it actually is – German bond yields nearly doubled. This caused a bit of a wobble in share markets. The big question is: are we seeing a resumption of the rising trend in bond yields that got underway last year and what does this mean for yield sensitive investments and shares? Since central banks are critical in all of this we’ll start there.

Central banks turn a (little) bit more hawkish

The action over the last week or so was largely driven by a somewhat more hawkish tone from key central bankers:

  • Fed Chair Janet Yellen is really continuing to reiterate that it’s appropriate to raise interest rates gradually. Nothing new there but comments by Yellen and other Fed officials referring to strength in share markets indicate that they don’t see share markets as a constraint to raising rates again.

  • More importantly, ECB President Draghi noted that “the threat of deflation is gone and reflationary forces are at play” and “political winds are becoming tailwinds” (presumably a reference to President Macron’s pro-reform and pro-Europe election victory in France, in particular) and that monetary policy will need to adjust once inflation rises.

  • Bank of England Governor Mark Carney indicated that “some removal of monetary stimulus is likely to become necessary” if risks continue to diminish.

  • Bank of Canada Governor Stephen Poloz repeated that rate cuts have done their job and that “we need to be at least considering that whole situation [low interest rates] now that the excess capacity is being used up”.

The last three basically signalled that thought is being given to an exit from ultra easy monetary policy. In the face of such seemingly synchronised comments, it’s little wonder bond yields rose. Perhaps the most significant was the shift in tone by Mario Draghi – with overtones of former Fed Chair Ben Bernanke’s indication in mid-2013 that the Fed will start phasing down (or tapering) its quantitative easing (bond buying) program. This saw bond yields back up and shares fall around 8% and became known as the “taper tantrum”. So maybe the current episode is “taper tantrum 2.0”.

Bonds and shares are a bit vulnerable to a correction

The rally in bonds this year had arguably gone a bit too far and positioning had become excessively long and complacent leaving them vulnerable to a rebound in yield that we are now seeing. Similarly, we have been concerned for some time that global shares are vulnerable to a correction given solid gains in most markets for the year to date and high levels of short-term investor optimism and complacency on some measures. As we have seen over the last week, worries about central bank tightening have provided a potential trigger. And this could have further to go if bond yields continue to back up sharply.

Three reasons not to be too fussed

However, there are several reasons not to be too concerned. First, the shift in the tone of central bank commentary just matches the improvement seen in global growth and the receding risks of deflation, so it is actually good news. Global business conditions indicators (or PMIs) are strong (next chart), the OECD’s leading economic indicators have turned up, jobs markets have tightened and global trade is up.

Global Business conditions
Source: Bloomberg, AMP Capital

In particular, Eurozone economic confidence readings – both for consumers and business – are strong and at their highest in nearly a decade (see the next chart). So it makes sense for Mario Draghi to sound a bit more upbeat. If growth relapses, easy money exit talk will pause or fade too – much as we have seen in the US at various points over the last four years.

Eurozone economic confidence and GDP growth
Source: Bloomberg, AMP Capital

Second, with underlying inflationary pressures remaining weak, monetary tightening is likely to remain very gradual. There are two main forces serving to keep inflation down:

  • Because of years of below-trend growth globally, spare capacity remains and this will constrain core inflation. While headline inflation bounced over the last year, this was largely due to the bounce in energy prices, which has not been sustained, whereas core inflation remains very subdued (at 1.4% year on year in the US, 1.1% in the Eurozone and zero in Japan). This partly reflects continuing spare capacity, which limits pricing power. As can be seen in the chart below whenever the capacity utilisation measure is around zero or below inflation tends to fall or remain soft. Of course this is a cyclical factor that will eventually fade.

Low capacity utilisation
Source: Bloomberg, AMP Capital

  • At the same time structural factors continue to bear down on inflation including technological innovation – eg, artificial intelligence and robots hollowing out the middle class and along with a rising services sector weighing on wages growth, Amazon reaping havoc on retailer margins in the US and potentially soon too in Australia, and Verizon in the US moving to unlimited mobile data plans (won’t this kill the need for the NBN for most households?).

As a result of these cyclical and structural factors, corporate pricing power and wages growth remains weak just about everywhere. The lack of significant inflation pressure will keep central banks gradual as we have seen with the Fed over the last four years since the taper tantrum of 2013:

  • The Fed – while Janet Yellen does not appear to be too concerned about inflation running below target (its currently 1.4% against the Fed’s 2% target) because she believes that the tight US labour market will eventually drive higher wages growth and inflation, others at the Fed have expressed concern about the inflation undershoot and so a slowing in Fed rate hikes is possible (eg, no hike in September, hike in December). There is certainly nothing in what Yellen has said pointing to a faster tightening.

  • The ECB – Mario Draghi is right to warn policy will need to adjust once inflation rises. But at this stage there is little evidence of much tick up in underlying inflation in Europe. The total of unemployment and underemployment in the Eurozone at 18.5% is about 4 percentage points above where it was prior to the GFC acting as a huge constraint on wages growth. And political risk around Italy will slow Draghi from moving too quickly. Our view remains that the ECB will announce a slowing (or taper) in its quantitative easing program later this year (from €60bn a month to maybe €30bn a month for 2018) but that rate hikes are a way off.

  • The Bank of Japan – with inflation stuck at zero and the BoJ committing last September to continuing quantitative easing and a zero 10 year bond yield until inflation rises above 2%, it’s likely years from any exit from easy money.

  • RBA – while the drag from plunging mining investment is fading and the RBA remains upbeat, soft consumer spending, slowing housing investment, high underemployment and record low wages growth are likely to prevent a rate hike for at least a year or more. So we have seen no hawkish tilt from the RBA.

Finally, even though global monetary policy has gradually tightened thanks to four Fed hikes over the last two years, it’s a very long way from tight levels that will bring the bull market in shares to an end. As such – barring an exogenous shock – this global growth cycle and bull market in shares will likely remain long and drawn out.

Implications for investors

At the time of the 2013 taper tantrum, there was much fear that an end to US money printing would lead to a major bear market, send bond yields sharply higher (as one source of bond buying dried up) and imperil the US and global economy. In the event it was a bit of a non-event as shares resumed their uptrend and the global economy continued to recover. The same is likely to be the case with the latest taper tantrum:

  • With inflationary pressures remaining weak and monetary tightening likely to remain gradual (and non-existent in many countries including Australia for some time) the uptrend in bond yields is likely to remain gradual too.

  • While shares remain vulnerable to a short-term correction (on easy money exit talk), with monetary tightening likely to remain gradual and dependent on a further improvement in growth it’s unlikely to become tight enough to cause a major bear market in shares any time soon.

  • The search for yield will likely continue but may fade in intensity as bond yields gradually rise. This probably means that, while listed bond proxies such as global real estate trusts and listed infrastructure may be constrained as they were initial beneficiaries of the search for yield, unlisted property and infrastructure have further to go.

Exiting from ultra easy money not the end of the world

Finally, for those who say that central banks can never exit money printing and zero interest rates – just look at the US! Over the last four years, the Fed has phased down and stopped money printing or bond buying, raised interest rates four times and announced that it will start allowing its bond holdings to run down by phasing down the rolling over of maturing bonds in its portfolio. Each of these moves have caused uncertainty but have not crashed the US bond market, shares or the economy. Other central banks are likely to follow the Fed model.

If you would like to discuss anything in this report, please call us on |PHONE|.

 

Source: AMP Capital 5 July 2017

Author

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital 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.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

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