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Rockanomics - March 2016

“Objects in the rear view mirror may appear closer than they are”So crooned the mighty Meat Loaf back in 1994. Or was that actually a mandatory safety warning engraved on all American vehicle side mirrors?With that in mind let’s look at March’s market moves with a healthy dose of perspective.


March 2016

What was?

“Objects in the rear view mirror may appear closer than they are”

So crooned the mighty Meat Loaf back in 1994. Or was that actually a mandatory safety warning engraved on all American vehicle side mirrors?

With that in mind let’s look at March’s market moves with a healthy dose of perspective.

Global markets, as measured by the MSCI World index, went up 4.3% and recovered all its year-to-date losses. But for all intents and purposes and on average, they remain in a corrective down trend (down 10% plus) from a May/June 2015 peak. And so a similar story it was for European large caps, up by a similar percentage but still firmly in the grips of the year-long downtrend to the end of the quarter. Emerging markets, the biggest beneficiaries in a recent rebound of resource/commodity prices (but also the biggest victims in the commodity downturn) went up a strong 9% for the month but remain tightly in the grips of a bear market from a September 2014 peak, down more than 25%.

Asian large caps, having recovered much of its 2016 losses, went ahead in March as well but like Japanese equities still remain suppressed, following an extended period of significant appreciation.

US indices, powered by a (continuing) multi trillion dollar Federal Reserve balance sheet expansion and now lately its hesitation to embark on its original rate hike plan, are now positive for the year. A gravity defying run up from February’s bottom, especially in Dow Jones Industrials and S&P 500 stocks, catapulted American equities to a 4.5% finish for March.

Within US markets, the utilities and consumer staples sectors, provided the biggest lifts for the year while energy, financials and healthcare remain under pressure. As an industry group, gold and silver mining companies rocketed 47% from a January bottom! Might be time to go digging for all that bling you banished to the 90’s.

Iron ore, buoyed by news of possible additional stimulus by the Chinese government, finished at its highest year to date, despite an intra month rally running out of puff. Because the Chinese really need to make more steel to make more buildings they don’t really need so all this overcapacity can be used as padding to calculate and maintain their all-important and eye brow raising 6.5% (or something) GDP print? Just speculating here of course.

Our ASX 200 followed in the footsteps of global markets - up 3.26% for the month, down for the year, and still off 15% from an April 2015 peak. Not much outshone the general market this time around. The tech and telco sectors were the only notable mentions on the positive side while consumer staples, healthcare and utilities (the usual safety play suspects) detracted. It might still be too early to say if another round of risk taking is on the cards and if we are seeing things through perspectives again, this month’s lagging (safety) sectors are still ahead of the overall market in the first quarter even if only just.

The Australian dollar shot up more than 7%. While it’s probably getting the RBA (and exporters) hot and bothered, this might just be a cheeky window for those diehard OZSALE and ASOS fanatics, what with having to pare back their online shopping over the last 18 months. The recent bounce in resource prices, an out-of-favour US dollar (due to diminishing Fed rate hike prospects) and a (still) positive interest rate differential (against the majority of currencies that are lower yielding) are contributing to the lift.

Private Wealth’s March managed about 1% across fixed income allocations and up to a 4% gain in our local small and micro-cap exposures. International and Asian shares’ performances crossed each other out to finish flat combined, while property edged up 2%

What now?

Negative interest rates.

Imagine a (perverse) situation where a bank “pays your mortgage” and on the flipside you were actually “taxed” for putting money in a savings account (on the pittance of interest you were so looking forward to earning!). Behold the wacky world of negative interest rates. We have in fact covered this in the past but some highlights bear repeating while new, unexpected consequences certainly deserve a mention as more nations push towards the twilight zone– in a seemingly desperate effort to stoke demand.

When the Bank of Japan took monetary policy negative in late January, what happened next was nothing short of market kamikaze! Some would go so far as to say hara-kiri but let’s stay on point. The already flagging Japanese market proceeded to dive 16% over the next couple of weeks, while the export fueling Yen got even more expensive! Cheaper money unfortunately didn’t provide the light they were seeking in the land of the rising sun.

This and other “absurdities” are beginning to rear their head and are now being well documented in mass media for your reading pleasure.

But an important question to keep asking (and position portfolios around of course!) is this. If global (or specific) economy/ies are doing “just fine” as the talking heads would like you to believe, why then are interest rates still so low (and going lower!) 8 years after the depths of the GFC?? Conventional economics (and by extension logic) tells us that one hallmark of improving economies is a cycle of rising rates. Or did they just teach that wrong in school? These are interesting times indeed, and as we have been discussing with our clients over the past 2 years, require a considered approach to portfolio construction.

What's that?!


Self-managed super funds (SMSF), the highly flexible and fastest growing superannuation vehicle, now make up more than 30% of the $2 trillion superannuation industry. The establishment of SMSFs have exploded over the past 5 years as investors, fed up with the ‘usual suspects’ grip on the superannuation and funds management industry, have looked to do things better themselves.

Unfortunately, those doing so in a DIY manner typically end up with large exposures to the ‘safe zones’ of Aussie blue chips, poorly returning cash/term deposits and allocations to residential property. Whilst residential property has provided decent returns over the past 5 years, the next 5 come with a new set of fundamentals. Along with the other two aforementioned holdings, most DIY investors are now realising that perhaps, it wasn’t actually a ‘cheaper’ proposition at all.

Like we always say, SMSFs are great if used effectively. Don’t buy a Ferrari, drive it around in traffic and expect to be happy with the performance.

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