Economic Update – January 2016

Summary

Within this month’s update, we share with you a snapshot of economic occurrences nationally and from around the globe. We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

Content

The Big Picture

We were forced to wait 50 weeks in 2015 for the Federal Reserve to hike its key interest rate for the first time in nine years. The angst was so great over 2015 since, at this time last year, there was talk of the first hike occurring last March or at least last June. But those months came and went – and so did September!

The problem with the September meeting was not only that they did they not raise rates as most had expected but the Fed confused all by showing their concerns over global economic conditions. So it was a relief when the rate was finally raised by 0.25% in mid-December with no adverse reaction.

But the damage had already been done. Our market all but reached 6,000 in March from 5,400 this time last year, only to fall to nearly 4,900 near the end of 2015. Then Santa took control and swiftly helped the ASX 200 rise back above 5,300 to finish the year only about 100 points down for the year. Of course investors in our market would also have collected dividends and franking credits of about +6.3% which is very good when compared to holding cash – even allowing for the ?2.1% ‘paper’ capital loss on the price index.

It would be unfair to blame all of the mid-year volatility on the Fed. Oil prices fell sharply because OPEC took on the might of the US shale oil producers. By holding up traditional oil supply, they made the shale oil alternative marginal at best. But the Saudis seemed to have miscalculated the ease with which one can switch shale oil supply on and off. As a result, Saudi Arabia has now found itself with a material government budget deficit problem – and they now intend to hike petrol prices at home by 50% to help rectify the situation. That’s called irony!

Iron ore prices too collapsed – again largely because of an over-supply problem. The ‘Big Three’ producers deliberately put the squeeze on higher cost, smaller mines.

Whether or not ore and oil prices have bottomed is disputable but almost no one of note is predicting prices to rise substantially in 2016. But with the resources sector falling from 36% of our index at the end of 2010 to 16% now, iron ore and oil prices are increasingly less important for an Australian index investor!

At home the big banks came under the spotlight as they were forced by the regulator to improve their balance sheets, to be better able to withstand any future home price corrections. They did this by issuing more shares through ‘rights issues’ which naturally depressed prices. No major additional raisings are expected for at least the next few years.

So the main things to watch for in 2016 are interest rate changes at home and in the US. The Fed published its forecasts which point to four hikes of 0.25% in 2016 while the market is pricing in only two! This disconnect is likely to lead to some short bouts of volatility around Fed meetings.

At home, the Reserve Bank is now thought less likely to continue to cut rates in 2016. There is a chance of one more cut but no one of note is expecting any hikes in 2016.

Market fundamentals are largely fine but it will take some time for investors to feel confident. We are predicting above average returns for both the ASX 200 and the S&P 500 – but nothing stellar. Bond markets might take some buffeting as Central Banks around the world change, or do not change rates.

So our view of 2016 is much like that of a patient just having left the dentist. The build-up was worrying, the treatment not too bad – and now the novocaine is wearing off – with dental health having been restored.

Prepared by Infocus Wealth Management

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