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ROCKANOMICS - March 2017 Quarter

A positive start it was for (nearly all) equities in 2017

What was?

A positive start it was for (nearly all) equities in 2017 as global stocks, measured by the MSCI All Country world index, went up 6.1% for the March quarter, even hitting an all-time high on its way there.

With U.S. economic fundamentals continuing to improve and the March unemployment rate the lowest in 10 years, the broad Wilshire 5000 equities index returned 4.3% as the trinity of the S&P 500, Dow Jones and Nasdaq indices clipped all-time highs. Technology and small cap stocks again did the lifting as was the case in the quarter before. Sector-wise it was financials and tech that were the biggest beneficiaries of investor rotation while consumer staples, healthcare, energy and utilities lagged. Loosening bank regulations, promises of tax reform, a new health care bill tanking and oil changing its mind yet again as to where it might be headed, all had the desired effect on the relevant sections of the market. Specific sector gains however were a clear indication that risk taking was certainly in effect in spite of lofty market heights and interest rates possibly “normalizing”. On that note the U.S. Federal Reserve raised rates for only the 3rd time since 2008.

Despite populist government possibilities and Britain officially activating its withdrawal from the European economic union, European large cap equities registered an impressive 8.4% return for the quarter. Investors have embraced Europe’s growth prospects as well as the lower stock valuations across the continent, looking past risks posed by the French (and other elections) and “Brexit”. Funds invested in western European stocks enjoyed their largest two-week inflows in more than a year. Furthermore, with the European Central Bank reiterating its commitment to maintain its asset buying program and keeping rates low, risk taking and rotation into the region’s equity markets should be buoyed. In fact, the Euro-Zone Composite PMI economic indicator last month suggested that the March quarter may have been the strongest for the European economy in two years!

An ETF measuring the performance of 40 large cap Latin American shares put the region up nearly 12%, continuing its sharp 15-month bull run (Trump’s border wall and taxes be damned!). Looks like markets might be calling a bluff. Emerging markets finished ahead 11.3% but were bested by Asia ex Japan, with more than 13% for the quarter. Even the typically bananas Middle East and African regions were up 4.4% collectively. In fact, the only place that didn’t get the bullish memo was Japan, which went DOWN 3.5%. But given the magnitude of the Nikkei’s run up from July 16, a little break or consolidation was probably overdue.

Commodities, as tracked by the benchmark Bloomberg Commodity Index, looked to be edging higher for the quarter only to take a precipitous drop in early March and in the end managing a flat finish. This could most like be attributed to crude oil’s 9% plunge during the same time before it too managed to recover most of those losses by quarter’s end. Oil traders fretted that growing US supplies are beginning to undermine OPEC led productions cuts. Gold shrugged off the resource dip to finish ahead more than 7% for the quarter, recouping about half its losses from the period before. It’s perception of safety is persisting and possibly gathering renewed conviction. Industrial bellwethers copper and iron ore powered ahead to fresh 15 month highs in February, the latter’s surge following China’s unprecedented fiscal stimulus to aid the revival of their construction and heavy industries.

Bonds, globally and on aggregate, despite some choppy trading, finished the quarter on a positive note managing to recover about a third of its price losses from that steep tumble beginning August 2016. But this renewed interest in fixed income, despite a Fed rate hike in March, maybe signaling that investors are not as upbeat about (the Trump or otherwise) economy as they were a few months ago. Moreover, the flattening of the US yield curve and the narrowing of spreads between American short and long term debt might be further indication of economic softness to come.

At home, ASX 200 continued to climb another 2.3% over the last 3 months. Drilling down a little deeper revealed that BHP skidded 5.5% during this time, RIO finished flat (despite the iron ore price surge) and the big banks were up on average 4.5%. While it was a generally positive quarter for nearly all market sectors, healthcare was the runaway benchmark index outperformer this time, notching double digit gains! Utilities and consumer staples were the next best yardstick beaters. Safety looks to be showing its hand and driving the overall market. However, the Razzie award for the quarter had to go to the Telecoms sector, which dived nearly 9%! If the performance of my internet is anything to go by, it’s no wonder! C’mon Australia, we deserve better web access than Kazakhstan! Or is the NBN the new MyKi?!?

The Australian dollar (vs the USD) had a good run this quarter, finishing up more than 6%, recovering nearly all its post American election losses and weathering the U.S. rate rise. How it holds up in the face of potential protectionist U.S. trade policies and tariffs, remains to be seen. The USD index (the US dollar vs a basket of major currencies) hit a peak around Christmas last year but has since backed away 3% for the quarter despite rising in anticipation of March’s Federal Reserve rate hike. The indicator is at post GFC highs though, exhibiting strength in demand and continuing to pressure American exports. With hundreds upon hundreds of billions (in short…trillions!) of USD denominated debt due to mature over the next few years, it won’t be a surprise if the US dollar stays generally strong for some time to come.

At Private Wealth, fixed Income had its challenges but edged ahead 1.5% on average across our different bond managers. Property allocations went up between 1.2 and 3.6% with our investments in the healthcare sector continuing to claim the top end of sector returns. Infrastructure exposures were up over 6% on average with AUD hedged investments also benefitting from the rise in the AUD during this quarter. Asian exposures, large and sundry, were up over 7% with small and mid-cap allocations managing to recoup some of the of losses presented by the challenges of the December 2016 quarter. Global and local small caps were pressured down 2% but this was offset by positive finishes from global large and local mid/micro- cap managers.

What now?

In the action-packed era that we by now should be more than used to, there’s hardly a dearth of headlines to captivate our imagination (or keep us up at night!). Locally, barely a day goes by now without the words “housing affordability” being emblazoned on all forms of media. This amusing (once you’ve stopped crying about it, you just have to laugh along) oxymoron – how on earth do you make something affordable when it is famously bandied about as THE asset class (to invest and speculate on in equal measures), with all the government sanctioned tools made available (negative gearing etc.) to aid in its continued proliferation as the de rigueur destination of Australian savings, hopes and dreams – has all the underpinnings to unamusingly shake the entire Australian economy, should it go just a bit pear shaped. The 3rd highest household debt to GDP ratio in the world (relative yes but you borrow more than you put out Australia – fact!), record low wage growth, and the banking’s system reliance on offshore wholesale funding (and thus exposure to rising rates overseas), should be raising more than just the random eyebrow. And now the doubly amusing proposition to allow people to dip into their precious retirement funds to put a roof (that they desperately want to own) over their heads? Given the vast majority of Australia’s wealth is embedded in its bricks and mortar, the Reserve Bank (and the government) may have their hands full in working out the best way to gently let the air out of this balloon.

Is the stock market overheating? We’ll this one has been around for a while but the chorus has gotten considerably louder given indices the world over are hitting all-time highs (on record low rates) and the equity bull market now embarking on its 9th year. But it still depends on who you speak to of course though a few seasoned American investment guns are now signaling some alarm bells over outsized valuations, heavy share selling by corporate insiders and record levels of margin debt in U.S. markets.

European shares may have been riding high the last few months but the risk remains that political instability in Europe could drive valuations down in the near term. Nowhere is this more apparent than via the impending results of the French elections which once more pits the establishment against a fast-rising populist (anti E.U.) movement threatening to overhaul France as the French know it. Oh and surprise, surprise….Greece is having trouble repaying some loans, yet again!

And then we have that dirty 3 letter word…..WAR. Once an easily dismissed and laughable outcome, is now suddenly not so funny when you’ve got nuclear warheads in the (tiny) hands of two (possibly more) of the most irrational and outsized egos of the modern era, with the mindless saber rattling and threats seemingly ratcheting up a new level, every passing week.

You couldn’t make this all up in a reality show even if you tried.

What to do? Make sure you have quality, diversification, err on the side of caution, and set your investment strategy with an appropriate level of risk to ride through volatile times should they arrive in the second half of 2017. And yes, talk to us.

What's that!?

An MDA? Whilst it sounds kind of illegal, this version is indeed very legal and an extremely effective method of managing an investment portfolio in a cost effective manner. To avoid any possible confusion though, MDA stands for ‘Managed Discretionary Account’, a technical term which probably means nothing to anyone other than a wealth manager.

Over the past 18 months the BlueRock Private Wealth team have been busily liaising with ASIC (the Australian Securities and Investment Commission – the top watchdog), our lawyers and various investment specialists to secure our very own Australian Financial Services Licence (AFSL), as well as the smarts and technology required to roll out the BlueRock Managed Discretionary Account portfolio service.

What does this practically mean? A higher level of investment sophistication, backed by a highly-experienced investment committee, with more direct investments across domestic and global markets, being actively managed in a more efficient and timely manner. Sound good? Well we would hope so. The roll-out of this project, which is due next quarter, is the culmination of 18 months of work. We have assessed the technological and investment landscape, analyzed many different options and structures, and even attempted to look into the future (via our crystal ball, which unfortunately doesn’t exist) in order to formulate what we feel is a best of breed solution for our clients.

In a world where the 1980’s stock broker model is dying by the day, and shiny new DIY solutions are being cleverly marketed, we are very confident about the holistic robustness of what we are about to deliver. Stay tuned.

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