Investment commentary October 2016
- Glenn Stevens leaves as governor of the RBA after keeping Australia steady through a tumultuous 10 years
- Oil price stability...at last
- Global equity and fixed income markets remain relatively flat, with mining and energy performing better
End of a remarkable era at the RBA
September marked the end of Glenn Stevens’ 10-year tenure as Governor of the Reserve Bank of Australia. The data shows that his was a very successful term, with inflation averaging 2.3% p.a. and unemployment 5.3% p.a. During this period we experienced a mining boom and bust, and a global financial crisis, yet Australia’s remarkable record of 25 years without a recession remains intact.
After two cuts this year in response to the recent bout of low inflation, cash rates have fallen from 6% at the time of Stevens’ appointment to 1.5% today. The new Governor, Philip Lowe, faces a different set of challenges and arguably has less flexibility given the starting point of today’s low cash rate.
Keeping an eye on oil prices and inflation
The oil price has been on a wild ride over recent years. Growth in new supply and weak demand led to a price fall of around 75% from mid-2014 until January this year. At around US$50 per barrel the price has nearly doubled from the lows. If it stays at these levels it will begin to have an inflationary impact, which would actually be welcome in a world that has seen persistent and pervasive low levels of inflation.
OPEC, the cartel of some of the world’s major oil exporting countries, met in early October and agreed to cap production growth. If this measure proves effective we may be heading into a period of greater price stability, and marginally stronger prices could actually be a positive for economic growth.
A flat month for global markets
September was a relatively flat month for equities at the broad index level, with Australian shares up slightly and international shares down slightly. Year-on-year however the returns have been quite strong. Underlying this relative calm though were significant deviations in performance. The rotation which began in August continued, with defensive sectors significantly underperforming the more cyclically-exposed sectors such as energy, materials and industrials. Fixed income markets were slightly weaker across the globe.