Mixed economic messages are causing confusion for investors but some of the risks for the year ahead have been overstated, according to Australian Unity Investments’ joint venture asset managers.
Chad Padowitz, chief investment officer at international equities manager Wingate Asset Management, said while there is a lot of focus on the ailing commodity markets, there are also positive signs.
“Markets are obsessed with oil as an indicator of global economic growth, and there is no doubt that commodity markets need to stabilise for markets overall to recover.
“However, in a more upbeat sign for markets, corporate health is positive, with the US and European Union growing.
“Our view is that markets are rebalancing to a lower growth world. While volatility will continue to be the new normal, we expect a market floor to be reached shortly,” Mr Padowitz said.
A similar story is playing out domestically, says Don Williams, chief investment officer at Australian equities manager Platypus Asset Management.
“The performance of the industrials suggests the economy is not as bad as some pundits suggest, and decent returns can be achieved (which was also the case last calendar year).
“Industrial earnings have held up reasonably well despite the subdued economic conditions, whereas natural resources companies’ earnings have been decimated.
“Natural resource names remain a ‘no go’ zone in our opinion; while they are unambiguously cheap, the majority of commodities remain in an oversupplied position and investors should expect commodities to track sideways for at least two years.”
Mr Williams added that Platypus is not expecting significant downgrades in this reporting period.
Mr Padowitz also said there are significant pockets of stocks that imply extreme fear, and these could be sources of opportunity for investors.
“The current valuations on some sectors can’t all be borne out. Safe haven stocks are defying gravity while financial stocks are implying GFC-type scenarios. This valuation mismatch cannot be sustained.”
Commenting on global fixed income, Bill Bovingdon, chief investment officer at fixed income manager Altius Asset Management, said central banks will wind down their stimulus programs and that will leave bond investors exposed.
“The expectation is for three rate rises in the US during 2016, raising rates to between 0.75 and 1 per cent. Clearly, however, if we had a financial crisis of some kind we could expect a response from the US Federal Reserve where they delay tightening.
“A hard landing in China would cause the Fed to pause. Otherwise the Fed has set its course and we think the global economy will handle them quite comfortably.”
Changes in US interest rates should have little effect on the Australian cash rate.
“If anything, we will be looking at potential rate cuts still being at least considered by the market. However, long bond rates in Australia will come under pressure from US bond rates, and we expect to see the yield curve steepen in Australia.”
Overall Mr Bovingdon is expecting 2016 will be a reasonable year for the Australian economy.
“We are expecting GDP growth in Australia of 2.75 per cent this year—much of that from infrastructure spending and the pick up in housing construction as well as stronger exports due to the weak Australian dollar.
“Conditions will be relatively positive for the consumer. Jobs growth is quite good and a lot of costs are reducing with lower oil prices and lower energy prices, which will boost disposable income.
“Our base case is that we are expecting no change in the cash rate from the Reserve Bank of Australia. Clearly the RBA will act to market conditions and how the economy pans out over the year, but the hurdle is quite high and the RBA will see little benefit in reducing rates further unless they can influence the currency.
“Much will depend on China, and it accounts for one third of our exports. But our expectation is that the Australian cash rate will still be 2 per cent at the end of the year unless the global economy takes a horrible turn.”
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