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Rockanomics - June Quarter 2019

Globally, on average, the benchmark equity All Country World Index rode out the dip to finish flat, but not before first losing 4% in May. U.S. markets went one better and gave the dip the slip, as all major benchmark share gauges finished up between 1.5% and 2.5%, with the S&P 500 hitting yet another record high!So, what was the lip on this dip?

What was?

A dip sandwich.

While this typically would conjure an extremely appetising image of an American culinary classic for all and sundry, outside the kitchen, there was no better way to describe market movements over the second quarter of 2019! And from the way equities finished up the period, a better taste was left in our mouths than if you had to consume the innumerable $#*! sandwiches constantly dished out by an expectantly whacky White House.

Globally, on average, the benchmark equity All Country World Index rode out the dip to finish flat, but not before first losing 4% in May. U.S. markets went one better and gave the dip the slip, as all major benchmark share gauges finished up between 1.5% and 2.5%, with the S&P 500 hitting yet another record high!

So, what was the lip on this dip? Given their constant need to stay in the headlines for any possible reason, the U.S. administration hijacked (a much needed) lull in the exhausting 24-hour news cycle and threatened (this time) Mexico with tariffs and China with even more! But the dovishness of the Federal Reserve and the subsequent non-event (of some of these threats) eventually cheered investors to recoup the steep sell-off, to varying degrees, across the global landscape.

Shares in large-cap Eurozone companies also managed to shake off the mid-quarter market wobbles to finish up 3.6%, as the European Central Bank hinted at further monetary easing should inflation not pick up.

Not all gravy though

Emerging markets and Asia (on the whole), however, did not perform as well, going down between 1.3% and 3.6% across major indices. Tariff threats tend to ring louder in these parts and existing ones continued to bite. In another tit for tat, the US and China raised tariffs to a higher percentage on each other.

Commodities, as measured by the oft-cited Bloomberg Commodity index, went down 1.2% for the quarter. This asset class has remained soft and suppressed over the last five years, as concerns for global growth outlook increase. Crude oil went down 2.8% and (industrial bellwether) copper tumbled 7.8%. Gold, however, surprised with a massive 9% quarterly gain! Precious metals are benefitting from talks of easier monetary policy (all over again!). When interest rates go down, the opportunity costs of holding gold fall. In addition, global bonds increasingly bearing negative yields don’t offer something gold does – inflation protection! Throw in the ever-present and concerning geopolitical rhetoric, and gold is still, clearly, the safe house of choice.

With all this talk of easier money and potential (and actual) interest-rates cuts, bond prices gained across the board. Corporate bested government and investment grade gained over high yield.

On the homefront…

In a nice and rare change of pace and pattern, the ASX 200 was not hungry for sandwiches of any sort. It instead powered its way to a 6.4% gain, hitting a new post-GFC high along the way! Not to be a wet blanket, but let’s not forget all this in an economy with weak overall growth and aided by the lowest borrowing costs ever seen in Australia. Just some context is all. But there was the spike in iron ore prices (from Brazil’s dam disaster earlier in the year) that propelled our mining titans’ share prices. And the Liberal election win, which aided bank stocks. Industrials, materials, IT and even telecom services (shock horror!) sectors were also a big part of this overall gain.

The Australian dollar (vs the USD) made another attempt to break down the 70-cent level. It did so and stayed below before managing to stage a rally back. But only just. A rate cut during the quarter (plus one more in July), and the potential for more, is now wearing our currency down.

Over at Private Wealth, there was definitely some good numbers across the board. Our domestic share portfolio returned 8.8%, while our International segment managed 4.9%. Both gratefully better than index. Fixed income managed 3.6% on the back of global bond gains, while specialist and alternative strategies also returned a healthy 4.1%.

What now?

Are we really doing this again?

The renewed chatter of rate cutting and quantitative easing, without sugar-coating it, doesn’t paint a rosy picture of the times upon and ahead of us. Shaving interest rates is simply not what you do when the economy is heating up and the fires of inflation are burning. Neither of those scenarios has acutely happened for plenty of ‘real’ economies, developed and developing. Looser monetary policy is a clear acknowledgement that “Main Street” economies need a big assist.

The stock markets on the other hand? We’ll that will clearly tell you a very different and many times (and especially since the GFC), an incomplete picture. A big portion of this cheap money, unfortunately, ends up on Wall Street, Canary Wharf, Collins Street, etc (you get the idea), eventually boosting share prices well past the point of actual fair value, thanks in part to cheaply funded speculation. Or in real estate, as we are all too familiar with now. And other amusing “esoterics”. Note that equity ownership (around the world) is only concentrated in the hands of a few. A figure from an NYU study a couple of years ago revealed that 84% of the US stock market is owned by the top 10% of households by net wealth. So, if some of you are feeling like you are always digging into your pockets hoping for loose change, you are not the only one buddy.

Sorry to sing the same old song but…

Does this feel all too familiar? How come we are back to cutting rates or talking about it when we’ve only just gotten into (or contemplated beginning) a cycle of hikes in plenty of regions? Did easier monetary policy not work the way it should have? Is the “vain pursuit of higher inflation” by central banks, as an economist put it, really the answer or the bulletproof catalyst to growth and good times? The facts before us may have something to say about that. But getting central banks and governments to look outside a very tired old box? Way above most mortals’ paygrades!

A clear divergence between the real economy and the financial markets has been developing for some time. If the past is anything to go by, a convergence will be on the cards at some point. How much further central banks attempt (or are able) to kick this can down the road remains to be seen.

A general “economic malaise” has indeed set in. But at the risk of sounding like a broken record (again and again…and again!), Private Wealth’s strategy of carefully considered diversification, nimble rotation, and the cold pursuit of value (in whichever corner of the world it can be unearthed) remains key, even in the face of these clouds gathering.

What's that?


Aaahhhh yes, that dirty word that’s re-entered our lexicon these past 12 months. It’s like talking about tuberculosis…you’d be forgiven if your response was “Does that still even exist?!??”. But thanks to someone who thinks a bouffant and an orange tan are de rigueur (along with a litany of other minute by minute WTFs), we have now wound the clock back on free trade and globalisation.

A tariff is a fixed or variable tax on imports or exports. Importers pay this to their local customs agency for goods they import into a country. And most times (but not always), these additional costs are passed on to customers in the form of higher prices. The intended effect is to discourage people from buying these imported goods and opt for locally made alternatives instead (or perhaps even shop around with another country altogether!).

Companies can manage the additional burden of this tax in several ways – suck it up (which will affect profit margins and consequently share prices if you are a listed firm), or cut costs in other ways, such as firing workers, deferring wage hikes, or raising end prices (which will, of course, have the effect of putting off some customers). None of these options are too pleasant. And no, the exporting country does not pay the tariffs, as a certain President keeps misinforming the public. It does, however, pay indirectly in lost business when importers potentially switch away. If they do. But with China (and by extension other developing nations) being practically the “world’s supplier of everything”, switching away may not be so easy.

On the flip side, unchecked free trade isn’t the economic utopia it is typically sold as and has a very funny and very real way of creating painful trade imbalances. The hunt for cost-cutting and greater profits has resulted in plenty of casualties – job losses galore, entire industries vanishing, regions decimated. Tariffs are simply a very base level, almost primitive, protection mechanism against this. History, however, is loaded with failed tariff experiments. Google it.

But what does this little blog writer know compared to the economic geniuses that inhabit the White House?

For more expert advice on the current investment landscape, get in touch with BlueRock Private Wealth.

Blue Rock Private Wealth Pty Ltd is a Corporate Authorised Representative of BR Advice Pty Ltd (AFSL 488655).

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