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Rockanomics

Rockanomics - December 2015

Alas! Taking a possible cue from the "The Boy Who Cried Wolf", Janet and Co. aka the U.S. Federal Reserve, finally went through with what must have been the most telegraphed (and teased about!) economic decision leading up to the Fed’s final interest rate meeting of 2015 - a staggering (sarcasm intended here) base rate hike of 0.25% and guidance for three to four more by 2016's end. Markets reacted as they typically would to what might have been the most 'priced-in' event in history - equities rallied (a classic "sell the rumour, buy the fact" move no doubt) while bonds and FX barely blinked in the hours after.
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What was December 2015 in world economics?

Alas! Taking a possible cue from the "The Boy Who Cried Wolf", Janet and Co. aka the U.S. Federal Reserve, finally went through with what must have been the most telegraphed (and teased about!) economic decision leading up to the Fed’s final interest rate meeting of 2015 - a staggering (sarcasm intended here) base rate hike of 0.25% and guidance for three to four more by 2016's end. Markets reacted as they typically would to what might have been the most 'priced-in' event in history - equities rallied (a classic "sell the rumour, buy the fact" move no doubt) while bonds and FX barely blinked in the hours after.

Despite Santa's best efforts, stocks worldwide finished down on average 3.4% for the silly month with Europe and Asia (excluding Japan) lagging 5.3% and 4.7% respectively. China's composite index was surprisingly up 2.4% in this period. The threat of jail time for short selling stocks might actually be working. Commodities/resources were unfortunately deep in the throes of the "how low can you go" spiral as the Bloomberg Commodity Index, illustrated in last month’s wrap up, took out its 16 year bottom. Word is, that if crude oil keeps dropping at this rate, it may be free within a few short months. Gold put in another multi-year low but remained unchanged by the month's end.

Over in the U.S., as a sector it should be noted that small caps (as tracked by the Russell 2000 index) were the underperformers for the year, down more than 5% for 2015 and off 11% since its June peak. Beyond the headline returns, eye-popping rallies in utilities and consumer staples were still unable to offset slides in the energy and materials sectors. Commodity wise, agriculture performed the best in December (as well as in the preceding 3 months). You have to eat right?

Locally, the ASX 200 actually bucked the sombre mood and rode Santa's sleigh to a 0.57% December gain despite another brief flirt with the sub 5000-point level. Iron ore unfortunately broke down and finished below the USD 40/tonne handle, a price range that we haven’t seen since 2007! A peak of USD 187/tonne in February 2011 would now seem like an exaggeration unfortunately. Despite a mid-month rally from multi-year lows, both BHP and Rio finished December in the red, capping off a painful year. CBA and Westpac, despite a difficult and roller coaster 2015, managed to eke out very minor gains. The Australian dollar (vs the USD) followed a near identical monthly trajectory as stocks, and finished the year at 73 cents.

"So how did Private Wealth do in 2015?" you may be asking? Firstly, it must be said that the period of volatility enveloping us has not been unexpected. Drawing on an age-old stock market saying, we thankfully weren’t “caught with our pants down when the tide went out”. A substantially underweight position in Australian blue chip shares, including banks and miners, and overweight positions in quality mid and small cap Australian shares, along with measured exposure to specific property allocations in our portfolios resulted in returns of between 5% and 12% for the calendar year (dependent on the level of risk set for each of our strategies).

It should be noted that our focus is strongly on internal benchmarks and targets relevant to a particular clients' risk profile. But to put it in common perspective, when you weigh it up against the ASX 200 (down 2.5% for 2015), the MSCI Emerging Markets (down 8.2%), the MSCI World (down 2.9%) and Australian Sovereign Bond (up 2.8%) indices, this was a result that we were comfortable with. Throw in the kind of year we had - the threat of a Greek exit from the European Union, the implosion of the Chinese stock market bubble and subsequent (government) attempts/meddling to re-inflate it as well as the devaluation of its currency that left markets from Sydney to Sao Paulo reeling, the growing ISIS intimidation and other simmering geopolitical threats, yet another Kardashian female in the form of Caitlyn Jenner (dear God how many more can they conjure!), a punishing downdraft for commodities/resources and all the resulting corporate stresses created (and brewing), and the long awaited U.S. rate hike! Top it off with the monumentally growing (and now feasible) idiocy that is Donald Trump's campaign for U.S. presidency and you could say our handpicked investment allocations performed very respectably indeed. Whilst our Asian exposure detracted from portfolio performance in the last quarter, we are still very positive about the medium-term growth prospects for quality Asian investments, which over the last 10 years, has provided significant returns for our clients.

What now?


How do you top a year that was made up of all the Indiana Jones movies combined, look like a yawn? We rather not ask to be honest. Could this be a preview to more challenging investing times? What effects of the first and subsequent U.S. rate hikes are there to be had? Will continuing Chinese Yuan devaluations (and possibly a Chinese government showing its hand in admitting a material slowdown) shake markets' confidence more than it did back in August 2015?

These and many others are all pertinent questions but unfortunately encompass, to varying degrees, a number of unknowns. What is very important for 2016 and more than ever, is a renewed and an even higher conviction to quality and where necessary, safety. We expect to see continued volatility; with our more conservative portfolios already positioned to weather such conditions and many of our growth orientated portfolios hording a higher level of liquid defensives ready for deployment into long-term investment plays.

What's that?


Carry trade. A frequently used strategy in investing, whereby the investor borrows money at a low interest rate in order to invest in an asset that provides a higher return, the difference in returns/rates thereby generating a positive carry. Common in the FX market, the healthy interest rate differential between the Australian and American dollars in the 4 years after the GFC, helped power the Aussie to lofty parity heights and beyond.

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Did you know?
The origin of the BlueRock name is a mash-up of the founders two favourite things.
Through a mutual love of the Carlton football team and Dwayne 'The Rock' Johnson, a firm was born!