Investment Market Conditions Update – January 2019

The equity markets have recovered partially from the significant but not catastrophic sell-off in October. As we indicated earlier such episodes will become more frequent and severe in the unstable policy environment being driven out of Washington, which is part of what has been a noisy presidency.

• Equity markets are still fairly priced from a longer-term point of view, with both monetary and fiscal policy still supportive of economic growth as well as financial asset prices, but momentum is becoming fragile. • Equity market momentum has been weakening back towards neutral. Increased caution is warranted with consideration of some reduction in equity allocation for more risk averse investors after any significant rises which will likely occur following further short run sell offs.

• The severity and the duration of the trade dispute between the world’s two biggest economies is not yet clear, nor will it be for some time to come. From time to time optimism about a resolution builds in the equity markets but can suffer setbacks such as late in the week ending 9 November.

• The shape of the yield curve, a good forward indicator of recessions and downturns in equity markets, has flattened but has not yet turned negative and so is not yet signaling recession or a more severe equity market downturn.

• It is possible to see the emergence of the causes of a recession in 2020 or soon thereafter. They include:

◦ A too rapid increase in interest rates in the US at the same time as fiscal stimulus is waning;

◦ Too much tightening of credit availability in China;

◦ Worsening disruption to global supply chains from the trade dispute between the US and China;

◦ The failure to find a compromise between the European Commission and Italy on Italian fiscal and banking problems;

• Based on the mainstream scenario of continued growth in earnings and low but rising short term interest rates and bond yields, together with a yield curve that is not yet negatively sloped (where long rates are lower than short rates) a neutral weight to Australian and International equities is still warranted at this stage.

• Allowing for the risks to the mainstream scenario:

◦ Holdings in the equity asset classes should be well diversified, with a significant weighting to more defensive funds or stocks. This will include equity funds that may from time to time hold enlarged cash balances for defensive or opportunistic purposes.

◦ Be prepared to reduce equities if the US ten-year bond yield moves significantly above 3.5% p.a. or if the yield curve turns negatively sloped or if the US- China trade dispute concerns continue to worsen.

View the full update here: IMC_November_2018

Welcome to the latest version of the Madison Investment Market Conditions Update.

Investment Market Conditions Update – October 2018

Welcome to the latest version of the Madison Investment Market Conditions Update.

Investment Market Conditions Update – September

Investment Market Conditions Update – July 2018

Investment Market Conditions Update – June 2018
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Investment Market Conditions Update – May 2018

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Scott Morrison’s third budget, delivered on Tuesday 8 May 2018, contains immediate tax relief for middle-income households, and a fundamental reform of the Australian tax system.

Click here to read our analysis: 2018 Federal Budget Analysis

Summary of key points

Inflation and why it is persistently so low? – We think it will average between 2.0% p.a. and 2.5% p.a. in Australia over the next ten years.

The likely path back to normalised monetary policy by the world’s central banks. We think it will be very gradual over the next five years, with the US leading and Europe and Japan lagging – so bond yields will be low enough to support equity prices for some time to come but will eventually put pressure on equities if US bond yields rise above 4% p.a.

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Summary of key points

Little seems to have changed over the course of the last month. Trump and Kim are still ranting at each other, although it seems to have a harder edge more recently. The Fed is still planning four rate rises by the end of 2018 and the markets still don’t believe it. Merkel is still the Chancellor of Germany, albeit with a more complex parliamentary situation to deal with. The US equity market is still at or near a record high in spite of all the worries that it seems to be ignoring.

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