Weekly Market Update – 17th April 2015

• Global shares are still favoured for 2015 given their attractive valuations and the very easy monetary policy stance of central banks. Global shares are much more appealing on a risk-reward basis compared to very low government bond yields. While there is the prospect of a significant global share correction sometime in 2015, low global interest rates and gradually improving global growth should remain strong positives for global shares. The known threats from higher US interest rates, Greece’s potential euro exit, geopolitical risk in the Middle East and the Ukraine, as well as China’s growth slowdown appear to be manageable for now. Accordingly, global shares should deliver solid returns in 2015 allowing for temporary bouts of turbulence.

• Australian shares have more modest immediate prospects for 2015 than their global counterparts. Lower commodity prices given China’s growth slowdown and concerns about the Abbott Government’s plans for closing the federal budget deficit seem to be capping risk appetites. The mining sector in particular is struggling with falling iron ore prices and Standard & Poor’s warning of possible credit rating downgrades. The ASX 200 seems to be facing formidable resistance approaching the 6000 level given these concerns. For the immediate term, Australian shares are likely to tread water until there are more encouraging signs regarding commodity prices and the federal budget as well as the Reserve Bank of Australia (RBA) cutting interest rates further.

• Low government bond yields presently are likely to give subdued returns from bonds over the next year. Given the prospect that the US Federal Reserve will start a gradual interest rate tightening cycle in the next six to nine months, rising global bond yields are likely to be a key issue and feature in 2015.

• China’s growth slowdown continued into the opening quarter of this year. China’s economic growth slowed to a 7% pace in the March quarter. This is not alarming for the global economy given that this has been anticipated and accords with the Chinese Government’s 7% growth target for 2015. However, China’s sharp monthly activity slowdown is more concerning for Australian commodity producers. China’s industrial production slowed to only +5.6% annual growth in March which indicates very subdued demand growth for Australia’s key commodities of iron ore and coal. China’s retail sales growth at +10.2% has been more resilient and suggests that China’s difficult transition to a more consumer-driven growth path is still on track.

• American economic activity now appears to be warming up after a cold start in the opening months of 2015. US nominal retail sales rebounded by +0.9% in March after the weak performances of January (-0.8%) and February (-0.5%). The harsh winter weather kept American consumers captive in their houses at the start of the year, but now these consumers seem to be returning to the shopping malls. US housing starts also rebounded in March by +2%, however this is a mild rebound considering the -15% fall in February.

• Greece appears to be edging closer to a sovereign debt default. Greece’s Finance Minister stated that Greece is prepared to “compromise” but not “be compromised” on budget targets set by the European Commission, European Central Bank and International Monetary Fund (IMF). So the Greeks are basically doing a sirtaki dance towards exiting the euro rather than play the ‘extend and pretend’ role in debt negotiations.

• The IMF maintained its 2015 global growth forecast at 3.5% for 2015. However, there were some significant changes to the individual country forecasts. America’s growth has been downgraded by -0.5% to 3.1% in 2015 given the recent slower activity data. Yet this is still an optimistic US growth view based on “accommodative monetary policy stance” and “lower oil prices”. Europe’s growth has been upgraded by 0.3% to 1.5% in 2015. Europe’s activity should be supported by “low interest rates and a weaker euro”. China’s growth forecast was held steady at 6.8% in 2015 but the IMF did highlight that China should see a “slowdown in investment” particularly in real estate. India’s growth forecast was upgraded by +1.2% to 7.5% given “policy reforms, a consequent pick-up in investment and lower oil prices”.

Major global economic events and implications