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Investment commentary April 2016

Quick overview

  • Incoming economic data much improved from the soft patch earlier in the year
  • Strong rebound in share markets globally as risk appetite returns
  • Bond yields remain anchored despite signs that inflation may be on the way

Doom and gloom gives way to optimism

2016 started off on a disappointing note, with economic data on average coming in below expectations. Volatility in share markets and exchange rates only made things worse and by mid-February sentiment had turned decidedly bearish. But the last six weeks have seen a dramatic turnaround as incoming data from the US, in particular, has been surprisingly strong.

Australia too has been better than expected, with growth in the 2015 December quarter coming in at 3%.

Big bounce in share markets...

Share markets around the world have responded to the improved outlook with some of the strongest performance in years, every major market recording gains. The Australian share market rose 4.8% in March, the US was up 6.8% and China 11.8%. More defensive sectors such as consumer staples, health care and telecommunications did lag the rally, but they were the better performers earlier in the year.

The Australian dollar rose nearly 8% against the US dollar in March, which offset all of the gains in international equities for an unhedged investor.

... and for commodities

The enormous drop in oil prices was probably the biggest story of 2015. But we’ve seen the oil price rebound some 40% from its lows – due to some signs that producers are cutting back production, and a more optimistic view on demand from emerging markets, The iron ore price has also been improving lately but the increase in global supply means further gains are likely limited.

Bond markets still not afraid of inflation

Despite the improving economic outlook and commodity price moves, bond yields around the world are trading at very low levels. Inflation data in the US was surprisingly strong in March and if we see this continue, bond investors might start demanding higher yields.