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Rockanomics

Rockanomics - October 2015

So look who finally opened their Federal Reserve invite and showed up (again!) to the “low rate, high times forever” party of the century? Which discerning latecomer you ask? The markets of course! And what a slumber party it was!
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What was October 2015 in world economics?

So look who finally opened their Federal Reserve invite and showed up (again!) to the “low rate, high times forever” party of the century? Which discerning latecomer you ask? The markets of course! And what a slumber party it was!

American major indices were up on average 8% in October, within striking distance of their July 2015 highs! Lest I get high myself from the number of times I was intending to use the word “high” to describe markets’ post August recovery, here are some eye popping monthly numbers:
   

Euro Stoxx 50 (Euro large cap shares)11%FTSE (not the abbreviation for your favourite game of flirty feet) U.K.4.7%Germany’s DAX14%AMP Capital Core Property (diversified property)3%STI Singapore7%Japan’s Nikkei7.6%China’s (everyone’s favourite casino) Shanghai Composite7.6%

   
It should be noted that emerging markets (as a whole) while up 8% for the month are individually still on average 20% off their July highs or still entrenched in short term downtrends.

Commodities continue to languish at post-GFC lows. While talks of supply cuts have given commodity bulls the impetus to put their mini party hats on, let’s face it, this is a demand driven dance when all the vuvuzelas have died down. Unfortunately, the “make it and they will buy it” marketing mantra only goes so far. Case in point was probably oil’s slick breakout to the USD $50/barrel price handle only to finish back in the mid $40’s where it has hovered for the last two months. Iron ore looked like it was stabilizing until it too decided to re-test its multi-year lows at below USD $50/tonne. Gold, in a technical analyst’s dream trade, shot up 6% but only to pare that gain to just 2.5% for the month.

Locally the ASX 200’s monthly run up was a more subdued 2.5% and at the time of writing, still in the grips of a multi month technical downtrend from May. Private Wealth’s clients have yet again felt the benefit of a lower allocation to ‘the norm’ in Australian shares, particularly given that a large part of our Australian share exposure is within mid and small companies, which once more selectively produced the best performance within the ASX 200. The Aussie dollar (vs the USD) managed a positive 2% but not before a decent effort to nearly 74 cents. Could sentiment be stabilising (or possibly even turning) for our dollar? Further proof as to its defense of the 70s will be needed, especially if the tide were to go against it again. If only those wealthy Chinese could keep sending their billions across, then who knows what might happen? Aren’t the ethereal property valuations of the Sydney housing market entirely dependent on it?

Scratching the domestic market a little deeper we find that the A-REITS (property) and Industrials (defence, building, transportation) sectors, which weathered the August storm best also bounced better than the overall market in October. Over in the US, soft commodities are on a two month rise while the top sector performer of the year, cyclicals (cars, airlines, furniture retailers), continue to push higher. Technology is up from late August and industrials (G.E., Boeing, 3M,) are showing promise.

At Private Wealth, our Asian allocations have been steadily recouping their lost, short term ground from the middle of the year. While fixed interest and property investments were both positive finishers for the month, special mention has to go to our international investment partners who managed to exceed their July highs in the face of a very challenging past few months. And if you’re in the mood for a recoup and then some (!!), how’s about our Aussie micro, small and mid-cap exposures? In the words of the legendary S-L-J…

Macquarie Asia (Asian mid-cap shares)2.5%Platinum Asia ( Asian large-cap shares)6%PIMCO Diversified Fixed Interest1%AMP Capital Core Property (diversified property)3%Magellan Global (international large-cap shares)5%BT Microcap (Australian micro-cap shares)4.5%Hyperion (Australian small-cap shares)6.7%Bennelong Ex-20 (Australian mid-cap shares)7.2%

For the month. Nuff’ said.

What Now?

Unfortunately, the season of diabolical witchcraft is once again upon us. No I don’t mean Santa Claus, flying reindeers and his indentured labourer elves. Rather the US Federal Reserve interest rate decision meeting in December, whose powerful pre-meet spell has once again got markets unhealthily transfixed. I can almost hear the groans and intermittent cries of “bull!@#$” across the investing landscape. We feel you. The Rock feels you.

Is J Yellen serious?

Solemnly apparently. Or is she? We certainly are - in maintaining our cautious tread into the near future. Given how long this bull market has run and the kind of juice powering it (i.e. ultra-cheap money and the intended/unintended mis-pricings that it has unleashed), it is difficult to be convinced that the recent rebound was fundamentals-driven but rather a very common market bounce into a possible longer term correction. Whilst there have been some improvements in the state of affairs for corporate America, developed nation counterparts and general global economic conditions (albeit from extremely sombre levels) since the GFC, further proof is warranted before we feel that investment markets will ‘rise again’ from their current range bound levels.

Our investment managers too have been very serious as they find themselves utilising the higher end of their cash allocations within their mandates. GENUINE corporate earnings (not the type generated from unproductive cost cutting and lay-offs) will be more closely scrutinised than ever, as those admittedly are getting harder to come by in a world of sluggish demand. Even so, are these really levitating stocks or is it the massive (executive compensation linked, cheap money funded) stock buyback programs that some of your favourite corporate behemoths continue to wield? And then you have those dang rates!

As the prospect of possible further monetary easing across the globe continues to propel the markets deeper into the world of “unknown unknowns”, we wait – on guard – and see. We are not making any immediate changes to existing portfolios but we are looking closely at some new allocations within Asia and international equities broadly, while keeping a watchful eye over the performance of our defensive allocations.

Why's that?

Gold’s (and silver’s) recent surge out of its doldrums may have made some recent headlines, only to disappoint towards the end of the month. Precious metal bugs - initially convinced that low rates will hold for some time, money printing will go through the roof (again!), and all social hell will break loose - suddenly changed their minds and got spooked that the Fed WILL probably raise rates in December. Outside periods of flights to safety and as gold does not earn a rate of interest when held (unlike cash), a prospect of any rate rise makes gold (and her other shiny friends) less attractive than money in the bank. Yes, apparently folks go absolutely bats#$! about the 0.01% that good ol’ Bank of America offers on its savings accounts!

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