Oliver's Insights

Escalating US-China trade war – triggering (another) correction in share markets

Shane Oliver, AMP

After a third round of talks made little progress last week, the US/China trade war has escalated badly with tit for tat moves on an almost daily basis by each side. This has seen share markets fall sharply with US, global and Australian shares down about 5-6% from recent highs and safe haven assets like bonds and gold benefiting on the back of worries about the global growth outlook. This note looks at the key issues.

The key points are as follows:

  • The trade war between the US and China is escalating, posing a rising threat to global growth

  • Although we remain of the view that a deal will be reached, the risk has increased

  • Share markets may need to fall further in the short term to remind both sides of the need for a deal and get them talking again

  • However, we regard the fall in share markets as another correction rather than the start of a major bear market

Read more

Australian growth will be constrained but here’s nine reasons why recession is unlikely

Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist, AMP Capital

For some time our view has been a less upbeat on the Australian economy than the consensus and notably the RBA. The reasons were simple. The housing cycle has turned down and this is weighing on consumer spending. And this is at a time when the risks to the global economy have increased as the trade war threat has ramped up again. All at a time when high levels of underemployment are keeping a lid on wages growth and, along with technology and competition, inflation

But the gloom around the Australian economy seems to have gone over the top lately with all the talk around rate cuts adding to the sense of malaise and more and more talk about a recession being inevitable. There must be some positives around. And there are! So, to inject some balance into the debate around Australia here is a list of positives. They are partly why we don’t see Australia as being about to plunge into recession.

The key points are as follows:

  • Australia’s current accounts deficit has collapsed

  • The Australian Dollar helps stabilise the economy

  • The drag from falling mining investment is over

  • There is scope for extra fiscal stimulus

  • Infrastructure spending is booming

Read more

The $A still has more downside, but a lot of the weakness is behind us

Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist, AMP Capital

While some have expressed surprise at the recent resilience in the value of the Australian dollar around the $US0.69-0.70 level despite weak Australian growth and Reserve Bank rate cuts, from a big picture sense it has already fallen a long way. It’s down 37% from a multi-decade high of $US1.10 in 2011 and it’s down 15% from a high in January last year of $US0.81. So, having met our long-held expectation for a fall to around or just below $US0.70 and given its recent resilience now is an appropriate time to take a look at its outlook.

The key points are as follows:

  • The Australian dollar likely faces more downside as Australian growth is weaker than US growth and the RBA is likely to cut more than the Fed. However, downside may be limited to around $US0.65 given that the $A has already had a large fall, short positions in the $A are large, the iron ore price remains high (for now) and the Fed is also heading towards rate cuts.

  • Given the downside risks for the $A and that being short the $A is a good hedge against threats to the global outlook it still makes sense for Australian investors to maintain a decent exposure to foreign currency via un-hedged global investments.

Read more

The nine most important things I have learned about investing over the past 35 years

Dr Shane Oliver
AMP Capital

I have been working in and around investment markets for 35 years now. A lot has happened over that time. The 1987 crash, the recession Australia had to have, the Asian crisis, the tech boom/tech wreck, the mining boom, the Global Financial Crisis, the Eurozone crisis. Financial deregulation, financial reregulation. The end of the cold war, US domination, the rise of Asia and then China. And so on. But as someone once observed the more things change the more they stay the same. 

The key points are as follows:

  • There is always a cycle

  • The crowd gets it wrong at extremes

  • What you pay for an investment matters a lot

  • Getting markets right is not as easy as you think

Read more

Australia slides into a “per capita recession”

This article looks at the outlook for the Australian economy following another quarter of very weak growth and what it means for investors.

 The key points are as follows

  • Australian growth slowed even more in the December quarter. Growth may bounce back a bit this year, but the housing downturn will likely constrain it to around 2-2.5%.

  • As a result, unemployment is likely to drift up and wages growth and inflation remain lower for longer.

  • The RBA is on track to cut rates this year and the housing downturn will likely see Australian shares continue to underperform global shares.

Read more

Five charts and a table that are critical to watch regarding the global economy and markets this year

This note looks at  five charts and a table that are critical to watch this year regarding the outlook for the global economy and markets.

 The key points are as follows:

  • After a strong rebound since December share markets are at risk of a short-term pull back. However, despite this we see this year as being a decent year for share market returns.

  • Five key global charts to watch as to whether this will be the case are: global business conditions PMIs; global inflation; the US yield curve; the US dollar; and global trade growth.

  • US recession indicators remain ok, but the yield curve is worth watching.

Read more

Four reasons the global economic outlook for 2019 looks positive

Shane Oliver, Head of Investment Strategy and Chief Economist.

Many investors were rattled by the equity market falls in late 2018, but Dr Shane Oliver says there are a number of reasons to suggest that in 2019 a well-diversified portfolio should deliver reasonable returns.

The main point are as follow :

  • This is a “mid-cycle” correction

  • No full-blown recession

  • Oil prices falling

  • Modest rate hikes or even cuts

Read more

The five big fears that shaped 2018

Shane Oliver, Head of Investment Strategy and Chief Economist.

It was always likely that 2018 would under perform compared to 2017, however five big fears shaped the market more than anyone had imagined.

The main point are as follow :

  • Fear of the Fed

  • President Trump’s trade war

  • China slowdown

  • Global desynchronisation

  • US dollar strength

Read more

Review of 2018, outlook for 2019 – another cycle extension

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note provides a review of 2018 and what it meant for investors and takes a look at the outlook for 2019. The key points are as follows:

  • 2018 saw reasonable global economic and profit growth and still low interest rates but it has been a rough year for investors with worries about the Fed, trade wars and global growth causing volatility and poor returns.

  • 2019 is unlikely to see the plunge into recession many fear with growth likely to stabilise supporting profit growth, the Fed is likely to undertake a pause in rate hikes and global monetary policy is likely to remain easy. The RBA is expected to cut interest rates.

  • Against this backdrop, share market volatility will likely remain high but markets should start to improve through the year.

  • The main things to keep an eye on are: the risks around the Fed, US/China tensions, global growth, Chinese growth and the property price downturn in Australia.

Read more

Rising US interest rates, trade wars, the US midterm election results, etc - should investors be worried?

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note takes a look at the current worry list for global investors.

The key points are as follows:

  • It’s still too early to be sure that the pullback in shares seen last month is over but we remain of the view that it was not the start of a deep bear market and that the trend in shares remains up.

  • Worries around US interest rates, trade wars, European politics etc are unlikely to be terminal.

  • The US midterm election turned out pretty much as polls indicated. Since 1946 US shares have rallied in the 12 months after all midterm elections.

Read more

Trumponomics and investment markets

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note looks at the risks for investors from President Trump’s approach and policies.

The key points are as follows:

  • So far President Trump has been positive for share markets but this year the focus is increasingly shifting to populist policies with greater risk for investors.
  • The key risks to keep an eye on in this regard relate to trade conflict and the expanding US budget deficit, although the latter is more a risk for when the US economy next turns down. 
  • However, the best approach for investors in relation to Trump is to turn down the noise given the often contradictory and confusing news flow he generates.

Read more

 

Italy is a worry - but 3 reasons not to be concerned about an Itexit

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note looks at the 3 reasons not to be concerned about an Itexit

The key points are as follow:

  • A populist coalition government in Italy is negative for Italian assets. Lingering uncertainty about a push for Italy to exit the Euro is likely a negative for the Euro too, though an Itexit and a Euro break up remain unlikely.
  • Eurozone shares are likely to be relative outperformers globally thanks to more attractive valuations than the US, easier monetary policy and a falling Euro.

Read more

After the Australian household debt and east coast housing booms – interest rates on hold until 2020

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note looks at after the Australian household debt and east coast housing booms.

The key points are as follow:

  • The RBA has left interest rates on hold for 21 months.
  • A rate hike is now unlikely until 2020: as growth is likely to remain weaker than the RBA expects; wages growth and inflation are likely to remain low for longer; bank lending standards are tightening further, and; house prices in Sydney and Melbourne are falling with more downside ahead. In fact, raising rates at time of falling house prices could be dangerous.
  • For investors: bank deposits will continue to offer poor returns; Australian bonds offer better returns relative to global bonds; and remain wary of the $A.

Read more

 

Correction time for shares?

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note looks at the recent correction.

The key points are as follow:

  • The US share market is long overdue a decent correction. This now appears to be unfolding and may have further to go as higher inflation, a slightly more aggressive Fed and higher bond yields are factored in.
  • This will impact most share markets including Australian shares.
  • However, in the absence of an aggressive 1994 style back-up in bond yields or a US recession – neither of which we expect - the pull back in shares should be limited in depth and duration to a correction (with say a 10% or so fall) and shares should have positive returns this year as a whole.
  • However, it’s likely to be a more volatile year than last year.

Read more

 

 

2018 – a list of lists regarding the macro investment outlook

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note looks at a list of lists regarding the macro investment outlook in 2018.

The key points are as follow:

  • 2018 is likely to remain good for diversified investors. The investment cycle still favours growth assets over cash and bonds. But expect more volatile and constrained returns as US inflation starts to turn up. 
  • Watch US inflation, bond yields, President Trump, the Italian election, China, the Sydney and Melbourne property markets and global business conditions PMIs.

Read more

Review of 2017, outlook for 2018 - still in the "sweet spot", but expect more volatility ahead

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note looks at the review of 2017 and the outlook for 2018.

The key points are as follow:

  • Despite the usual worry list, 2017 has been pretty good for investors as global growth and profits accelerated and central banks stayed benign as inflation stayed low. 
  • The “sweet spot” combination of solid global growth and profits and yet low inflation and benign central banks is likely to continue in 2018. However, US inflation is likely to start to stir and the Fed is likely to get a bit more aggressive. Expect a gradual rise in bond yields and a rising US dollar. The RBA is unlikely to start hiking rates until late 2018 at the earliest.
  • Most growth assets are likely to trend higher, but expect more volatility and more constrained returns. Australian shares are likely to remain laggards.  
  • The main things to keep an eye on are: the risks around Trump; inflation, the Fed and the $US; bond yields; the Italian election; China; and Australian property prices.

Read more

Why cautious optimism is better for your investment health than perma pessimism ?

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note looks at why cautious optimism is better for your investment health than perma pessimism.

The key points are as follow:

  • Worries about an imminent financial crisis remain high. Australians seem particularly negative about the year ahead.
  • However, the global economy is the strongest it’s been in years.
  • More fundamentally, cautious optimism is essential if you wish to succeed as an investor.

Read more

Will technology destroy jobs and inflation?

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note looks at whether technology will destroy jobs and inflation.

The key points are as follow:

  • Fear of machines taking human jobs is nothing new. But what is now different is the ability of machines to replicate human cognitive skills across many industries, rather than just in manual industries (like in manufacturing).
  • The adoption of new technology won’t destroy the need for human jobs and cause a mass surge in unemployment. Technology will make some jobs obsolete but it will create others in its place. But, technological changes will further distort the labour market by putting pressure on middle-skill routine jobs and incomes. Non-routine cognitive and manual jobs will grow in importance as populations age and advanced economies become more service-based.
  • Technological improvements are a long-run factor behind lower inflationary pressures. But, impacts on inflation from machine learning (the latest tech novelty) is still too early to be seen. Inflation is mainly being kept down by a slower than expected recovery to stronger GDP growth after the Global Financial Crisis.
  • The government has a role to play to monitor the social impacts of technology and to ensure that the right education and training is being provided to the population so that there is flexibility in skills retraining and labour mobility.

Read more

The medium term investment return outlook remains constrained

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note looks at the medium term investment return outlook which remains constrained.

The key points are as follow:

  • A further fall in investment yields across most major asset classes points to a constrained medium term return outlook. For a diversified mix of assets, this has now fallen to around 6.5% on our projections.
  • For investors the key remains to: have realistic return expectations; allow that inflation is also low so real returns aren’t down as much; focus on asset allocation and focus on assets with decent & sustainable income.

Read more

Where are we in the global investment cycle and what’s the risk of a 1987 style crash?

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note looks at the global investment cycle and the risk of a 1987 style crash.

The key points are as follows:

  • There is still little sign of the sort of excesses that precede major economic downturns and major bear markets suggesting that (although US shares are overdue a decent correction) we are still a fair way from the top in the investment cycle. Key to watch will be rising inflation and aggressive monetary tightening.
  • The current environment around share markets is very different to 1987.

Read more