Investment commentary June 2016

Analysts expect Australian shares to grow earnings by 10% in calendar year 2017, which would be a strong result and which will rely heavily on a recovery from the resources and energy sectors. If these optimistic forecasts are not met then investors might be less willing to support these high valuations, and markets could reprice lower.

All eyes are on the Fed

Economic indicators in the US are reflecting an environment of steady growth and core inflation trending back to normal. The “will they, won’t they” debates about whether or not the Federal Reserve will raise interest rates continue to drive markets and officials’ speeches are combed for hints one way or the other. While the committee remained on hold in June and may also do so in July, it is still likely that rates will rise at least once more in 2016. This shouldn’t really be a surprise to markets but it’s such an influential measure that even a widely expected change might still cause volatility to rise.

RBA in a quandary

Back home our central bank cut rates to 1.75% in May, responding to the weakest core inflation reading since 1999. The markets quickly moved to price in another cut before year end. The RBA needs to tread carefully though. The overall economy is actually growing at a healthy pace of 3%, unemployment is low and the housing market is booming. Their mandate is to promote price stability which suggests they should continue to cut rates until inflation improves, but they’ll be carefully weighing up the risks of creating asset bubbles which could create problems down the track. 

Political ‘Black Swans’

While the results of the Australian election are unlikely to faze markets, there are two other political campaigns underway which could have wide reaching effects.
The first is a referendum in late June to decide whether or not Britain will remain in the European Union (colloquially known as Brexit).