What was November 2015 in world economics?
Christmas is surely in the air as Santa and Co – you know Prancer, Dancer, Blitzen and the rest of the motley crew – flew in to rescue equity markets from an early month dive. American markets however, after solid gains in October, finished down 2% in November. Europe continued to capitalise and pushed ahead 2% for the month while globally, the MSCI World Index pared monthly losses down to 1%. Emerging market weakness was still prevalent as the sector found itself down nearly 6%.
The US dollar, already at lofty levels for the entire year and after a two month long breather, surged ahead towards the top end of its range. That did nothing but help pummel commodities even further as the Bloomberg Commodity index is now within range of a 16 year low – 22% below the depths of the GFC.
On home soil, the ASX 200 round-tripped its way to finish flat for the month. Scratching the surface we find big banks like Commonwealth and Westpac continuing their respective bounces from two year lows set a couple of months ago, but still some way off their all-time highs. The price of Australia’s once favourite export a.k.a. iron ore plumbed new depths and now looks set to test and possibly breach the USD 40/tonne handle. Weak steel demand/prices, a persistently expensive US dollar and growing Chinese steel mill closures don't augur well for the commodity in the short term. There's only so many (Chinese) ghost towns you can build before the ghosts come back to haunt you? The big news off the back of this and the recent disaster at its Brazil mine, was of course BHP shares hitting a 10 year low. Clean up bills, fines and mounting accusations of gross negligence are going to cost the big blue chip many, many pretty pennies. Pennies it insists, it will still pay in dividends!
Industrials and A-REITS sectors continue to outperform the overall Australian market and are now joined by technology and health care. Materials and resources, as you would expect, took a 10% battering each. Our dollar did us proud by successfully defending the 70 cent level, finishing up 1% even in the face of slowing foreign property buying. Is the movement of the Aussie dollar, despite renewed buying of the USD, possibly suggesting a rate move the other way?!? Apparently the RBA is finding green shoots within some of our recent economic data, which may at the very least lend weight to 1) a rate-cut-pause in the near future and 2) a chat to Jamie from our debt advisory division about looking at some pretty attractive fixed-rate mortgages.
At BlueRock Private Wealth fixed interest allocations took an early November dip especially after a strong American jobs report, as bond yields predictably rallied to price in an increasingly expected December U.S. rate hike announcement. But once the dust settled and by month’s end, these defensive recommendations managed to very nearly climb out of that trough. Our property allocations, overall, finished about flat for the month, but on a year to date basis are still up 9%. And once again Australian micro, small and mid-cap investments trumped large-caps, right across the month and all through the V-shaped rollercoaster equities ride. Unfortunately and not uncommonly, a much-maligned side effect of diversification is that you can’t win it all, every time. Our global and Asian equities tumbled into the monthly red zone as U.S. consumer staples/cyclicals took a hit, resources and China continued to slow and a U.S. rate rise looks to be back on the table.
All eyes on the Fed! A robust November U.S. jobs picture, other favourable economic numbers and comments from Federal Reserve committee members have now got markets pricing a near certainty of a rate hike when Fed heads meet on December 16. Here’s a summary of just some of the immediate effects (blindingly obvious and otherwise) to consider, should rates go up:
• An increase in borrowing costs to American businesses and consumers – though many won’t fret about a little uptick, companies with low grade debt could find their interest payments rising more quickly and consequently facing financial strain. Consumers will be forking out more for car & student loans, mortgages, credit cards and borrowings of any sort.
• The exposure of the bond market – highly rated debt is trading at very low yields and can be vulnerable to even a modest rate rise; junk bonds could suffer more if it tips the issuing companies into financial stress.
• The vulnerability of emerging markets – a further rise in the US dollar fuelled by a rate hike would be a kick in both b@!!$ for nations trying to service their (US) dollar denominated debt – debt which according to the IMF has doubled in the last 5 years. On the flipside, if investment returns rise in the US, more capital could find itself flowing out of these nations. And no one likes capital outflows.
• Overarching all of the underlying effects, of which there are many more than those mentioned above, is the impact on the US economy as a whole - like the good old days of playing the seesaw at the local park, this is the balancing act that the U.S. Fed and indeed the rest of the economic world, will be very mindful of.
The magnitude of the above will, of course, depend largely on how much of the rise has been priced in and further down the road, the speed and trajectory of any potential tightening cycle. One thing’s for sure, “when the tide goes out, we’ll surely see who’s swimming naked”.
Since the GFC, we have been inundated with news about short-term ups and downs in markets/world economics as part of the daily rantings of mainstream media. As a result, it is increasingly crucial to always take a step back and remember what investing is actually all about. From our perspective, it is buying top quality investments (via smart asset/portfolio allocations) in sectors, regions and assets classes that are likely to provide solid long-term growth to protect you from the effects of inflation, whilst at the same time providing you with income. The most important aspect of investing should be the peace of mind and lifestyle that wealth accumulation allows you to enjoy and ultimately the focus it grants you on the more important things in your life- whether that be your family, enjoying good food and the company of good friends or partaking in your favourite hobby. Lest we forget!
Santa Claus rally? As much as this conjures images (for yours truly at least) of angry parents protesting on the streets insisting that their children be allowed to continue believing in a lie contrary to all the available evidence, it’s not. The much-used term in the month of December typically refers to a surge in share prices that often occurs between Christmas and New Year’s day. To perfectly summarise this (believe it or not, statistically proven observation) Investopedia has it attributed to “tax considerations, happiness around Wall Street, people investing their Xmas bonuses” and…..wait for it…”the fact that pessimists are usually on vacation that week!”
Merry Christmas and may the Fed be with you!