Investment commentary April 2015
In April we saw significant reversals in the key trends of the last 12 months, with the oil price rising significantly and the US dollar falling. With the gradual normalisation of monetary policy in the US now on the medium term horizon, we expect to see more volatility in markets as economic data confirms or contradicts this policy direction. Meanwhile developments in Asia and Europe add to the degree of uncertainty and reinforce the need for a diversified approach to investing.
The Reserve Bank of Australia (RBA) decided to keep interest rates steady at 2.25% in April, then cut rates to 2.00% in the first week of May. This was the second rate cut of 2015. Considerations for Australian monetary policy settings need to take into account the weaker demand for our commodity exports and the impact this has on business investment, as well as the potential that ‘loose’ policy might create problems by pushing up asset prices and inflation. The exchange rate also features prominently in the RBA discussions, and so the recent strength of the Australian dollar in the second half of April may have been enough to tip the balance in favour of lowering interest rates in May.
Australian shares were weaker in April. The Financials, Healthcare and Property sectors fell, while Energy, Materials and Utilities were stronger.
In the US, employment growth data finally joined other key metrics in signalling a slowdown in economic growth. This may be weather related, as it was in 2014, in which case we would expect to see a significant rebound over the coming months. With so much of the optimistic global economic outlook riding on strong growth from the US this year, there’s a lot of focus on each new release of key economic data. The Federal Reserve has made it clear it will be guided by developments in economic data when setting monetary policy, so weaker or stronger-than-expected data sees the market attempt to reprice the future path of interest rates. This is leading to an increase in volatility across all markets, most notably in currencies.
Equities were up in April and 10-year government bond yields also rose for the month, ending at just over 2%.
We’re continuing to see positive economic signs from Europe, with Industrial Production growth for the year to February coming in at 1.6% compared to consensus expectations of 0.7%. This month marked an inflection point for the Euro which halted the extended slide that began in mid-2014 and rose around 6% in the last two weeks of the month. Inflation is still very low and unemployment very high, and the political risks represented by Greece and Russia remain at the forefront. Nevertheless, sentiment towards Europe appears to have turned more positive and investors seem more disposed to looking on the bright side.
Bond yields across Europe rose in April, reflecting the more optimistic economic outlook. Share prices fell in the Euro area but were stronger in the UK.
China’s year-on-year economic growth rate declined to 7%, the slowest since 2009. This was not a surprise given that focus on restructuring the economy is taking precedence over the level of growth, but it does suggest that further policy easing may be required.
Japan’s credit rating was downgraded by Fitch from A+ to A, following a similar downgrade by Moody’s late last year. The downgrades are in relation to the fiscal outlook and specific concerns that the decision to delay last year’s planned consumption tax increase would make it difficult for the country to balance its budget.
The Australian dollar traded in a range from 75.7c to a high of 80.5c over the month. However, this movement was really all to do with the weaker US dollar. As we highlighted last month, the overwhelming consensus amongst investors was that the US dollar would continue to appreciate against major currencies. When the consensus becomes overwhelming it can tend to also become fragile, so the questions now being asked about the real underlying strength in the US economy given the deterioration in data have caused a sharp reversal in the upward trend of the currency. We expect currency volatility to remain elevated and near term forecasting to be very difficult.
The oil price rallied in April and while it’s still well below the average of recent years, it’s now nearly 40% above the lows reached in January. The deflationary impact of falling oil prices may turn out to have been a fleeting phenomenon.
Iron ore fell to US$47 per tonne early in the month but there are some signs that it may have bottomed. Both BHP and major Brazilian producer Vale indicated they will slow production growth, although Rio Tinto have not indicated any plans to cut back at this stage.