Hot Issues
spacer
Rising US interest rates, trade wars, the US midterm election results, etc
spacer
Our Advent calendar for 2018
spacer
Responsible and ethical investing
spacer
What are the 3 biggest living expenses for households?
spacer
Your Adviser and Behavioural Coaching
spacer
Stop!! Don't do a paper Budget, use our online budgeting tools instead.
spacer
Information needed to be the BBQ expert.
spacer
Would you like to retire by 40?
spacer
The property cycle and the economy
spacer
How financial advice helps create wealth.
spacer
7 money personalities you may identify with or want to avoid
spacer
Are shares expensive?
spacer
How's Australia doing statistically?
spacer
Super investment options – what’s right for you?
spacer
Here's how to lead a happier life
spacer
What happened to all the worries about rising inflation and bond yields? Goldilocks, tariffs, Turkey & other things
spacer
Is it better to buy an investment property or home first?
spacer
Nine keys to successful investing
spacer
This information will turn you into a fireside expert.
spacer
How Australians will use their tax return
spacer
Lessons from the blue zones: secrets of a long life
spacer
Trumponomics and investment markets
spacer
Tools for budgeting, cash flow, Super and more ….
spacer
How much super should I have at my age?
spacer
How tax deductible personal super contributions work
spacer
The rise of the gig economy and side gigs (thanks to technology)
spacer
Statistics for all Australians
spacer
Watch out for tax scams
spacer
After the Australian household debt and east coast housing booms
spacer
Now’s the time for tax planning
spacer
Why it pays to contribute to your partner's super
spacer
Australia by numbers – Update
spacer
How to deal with financial stress – nearly 1 in 3 affected
spacer
Federal Budget 2018 – Overview
spacer
Your Budget
spacer
4 components of our 2018 Federal Budget
spacer
US China trade war fears – Q & A
spacer
Tools to help you manage your financial position are available on our site.
spacer
7 ways to boost your super
spacer
Australians reveal their priority goals
spacer
Australia by numbers – Update
spacer
Your retirement questions answered
spacer
How to make money by turning your unwanted goods into cash
spacer
Our website is really our digital office.
spacer
Bitcoin – is it really for you?
spacer
Spread your money, reduce risk
spacer
Love and money? It’s not about control
spacer
The pullback in shares - seven reasons not to be too concerned
spacer
Australia. All you need to know to be the expert.
spacer
Australian’s love affair with debt - how big is the risk?
spacer
5 ways to keep a cool head in a falling share market
spacer
2018 – a list of lists regarding the macro investment outlook
spacer
Sports lovers enjoy better financial fitness
spacer
Where Australia is at. Our leading indicators.
spacer
The year that was and the year ahead
spacer
Add some extra cash to your New Year
spacer
New year, new financial resolutions
spacer
Our Advent calendar for 2017
spacer
Where are we in the global investment cycle?
spacer
Australia's vital statistics
spacer
12 ways to enjoy summer without spending a fortune
spacer
One in three Aussies travel without protection
spacer
Digital payment options could see you spend more this Christmas
spacer
If you’ve always thought property prices only go up…
spacer
Will Australian house prices crash?
spacer
Where are we in the global investment cycle and what's the risk of a 1987 style crash?
spacer
Money steps for women
spacer
Resources on our site to help you, your family and your friends.
spacer
Australian Dietary Guidelines and healthy eating chart (PDF)
spacer
How to retire, your way
spacer
Prepare for retirement without missing out today
spacer
Be the boss of your cash
spacer
The Australian economy bounces back again
spacer
Should you lend money to family?
spacer
Money mistakes people make in their 50s and 60s
spacer
Australian Dietary Guidelines and healthy eating chart (PDF)
spacer
Eight steps to improved cashflow... and lifestyle
spacer
Powerful Budgeting, cash flow and Super Tools available on our site.
spacer
5 ways Australians will use their tax return this year
spacer
Australia's leading causes of death - ABS
spacer
The threat of war with North Korea
spacer
Six traits of Australians living the dream
spacer
The break higher in the Australian dollar is likely to be limited
spacer
Money can buy you happiness, you’re just spending it wrong
spacer
Key Economic Indicators, 2017 – updated
spacer
Helping your kids buy a home
spacer
From Goldilocks to taper tantrum 2.0
spacer
What’s your debt age?
spacer
Doing a budget is a good idea but ....
spacer
Planning is the key to making it financially
spacer
What to do when you come into money
spacer
Managing your money when you move in together
spacer
Reduce your bills with these household items
spacer
It pays to contribute to your partner's super
spacer
How to cope with losing independence
spacer
Transition to retirement income streams
spacer
The Australian economy hits another rough patch
spacer
Watch out for tax scams
spacer
The three core pillars of this year's budget
spacer
Federal Budget - 2017-18 - Overview
spacer
Federal Budget - 2017-18 - Budget documents
spacer
Make the most of the current super caps
spacer
Five, four, three… it’s not too late to get more in super
spacer
Super changes are coming
spacer
What’s your debt age?
spacer
Australian cash rate on hold
spacer
Super changes this financial year - Dr Shane Oliver - video
spacer
The door is closing on super’s current caps
spacer
Is Donald Trump's honeymoon with investors over?
spacer
Estate planning and why you need a super plan
spacer
What does a comfortable retirement look like?
spacer
Give your career a health check
spacer
Super changes from July 2017
spacer
Changes to the Age Pension assets test
spacer
Keep your money safe over the silly season
spacer
Looking ahead at 2017
spacer
Review of 2016, outlook for 2017 - looking better despite the political noise
spacer
Merry Christmas for 2016, a Happy New Year and a prosperous 2017.
spacer
54.2 million worries
spacer
Five tips for happy healthy ageing
spacer
Thinking about managing your own super?
spacer
Sending more to the tax office than you should?
spacer
Government pulls back on proposed changes to super
spacer
Market Update - What to consider when investing in a low return world
spacer
Stop!! Don't do a paper Budget, use our online budgeting tools instead.
spacer
Oliver's Insight - Megatrends
spacer
Value of Advice
spacer
A growing family doesn't have to blow the budget
spacer
Blinded by optimism
spacer
Thinking about managing your own super?
spacer
The investment outlook - it's not all that bad!
spacer
What’s your biggest obstacle to financial success?
spacer
Ageing Parents
spacer
Should you own the roof over your head?
spacer
Be a senior entrepreneur on your own terms!
spacer
Brexit and other key developments
spacer
Brexit wins
spacer
Commentary on major issues - AMP
spacer
Five money habits for a happy financial year
spacer
Remember to factor in parental subsidies at tax time
spacer
Are grandparents giving too much?
spacer
2016-17 Federal Budget - AMP
spacer
2016 Budget in detail
spacer
How (and why) to talk to your adult children about insurance
spacer
Procrastination: Just do it. Eventually.
spacer
Why Australian property won't collapse
spacer
The Lucky Country holding up pretty well
spacer
Have we reached the bottom?
spacer
The evolution of the Chinese consumer
spacer
Retirement rolls around faster than you think
spacer
Pressed for time?
spacer
Changes to the Age Pension assets test
spacer
Women are building financial intelligence
spacer
Heirlooms no more
spacer
Initial market falls precede stronger returns - Shane Oliver
spacer
What exactly is income protection insurance and do I need it?
spacer
A rough start to the year, which could have further to go
spacer
Aged Care - Changes to Assessment of Rental Income
spacer
A bump in the road, then a new start
spacer
New year, new start – are you ready for retirement?
spacer
Review of 2015, outlook for 2016 - Dr Shane Oliver
spacer
We wish you a Merry Christmas for 2015 and a Happy New Year
spacer
Go easy on the plastic over Christmas
spacer
Resolutions for a wealthy future
spacer
The Australian dollar doing what it normally does - overshoot. Dr Shane Oliver
spacer
How to manage volatility in a low return world
spacer
The Australian economy - more help will be needed. Dr Shane Oliver
spacer
Insurance through my super
spacer
Four tactics to build an investment portfolio
spacer
The demand for global infrastructure
spacer
Help achieve your investment goals with dynamic asset allocation
spacer
The Power of Budgeting
spacer
Jump retirement hurdles with a coach
spacer
Preparing for the time of your life
spacer
A Super Loan for all reasons
spacer
Making a smooth transition
spacer
Budget 2015 - some professional opinions
spacer
Australian Government - Budget 2015
spacer
Achieving a comfortable retirement
spacer
Is off-the-plan on the money?
spacer
Should I take my super as a lump sum or not?
spacer
Do you have a key person in your business?
spacer
Tips for success in a competitive job market
spacer
All you need to know about buying at auction
spacer
To sell or not to sell?
spacer
Saving in a material world
Rising US interest rates, trade wars, the US midterm election results, etc

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

       

 

Should investors be worried?

Key points

  • It’s still too early to be sure that last month’s pullback in shares 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. 

Introduction

October was a bad month for shares with global shares losing 6.8% in local currency terms and Australian shares losing 6.1%. It’s possible that following top to bottom falls of 9% for global shares, 11% for Australian shares, 21% in emerging markets and even 31% in Chinese shares we have now seen the low in the share market rout. Shares were due a bounce and from their October lows and Australian shares have risen around 4%. But it’s impossible to be definitive and with the worry list around US interest rates, trade, politics, etc, there could still be another leg down. However, our view remains that recent turbulence in share markets is a correction or a mild bear market at worst (like 2015-16) rather than the start of a deep bear market like the global financial crisis. This note reviews the key recent worries for shares and why they are unlikely to be terminal. 

US inflation & interest rates

The US economy is very strong as evident by consumer confidence at an 18-year high, unemployment at a 49-year low and strong economic growth. With spare capacity being used up wages growth is edging higher as evident in the next chart. 

US wages growth slowly trending up

Source: Bloomberg, AMP Capital

Against this backdrop it makes sense for the Fed to continue the process of returning monetary policy and interest rates to something more normal. Naturally, the ongoing removal of monetary stimulus in the US creates consternation and has been periodically ever since former Fed Chair Bernanke started talking about slowing or “tapering” quantitative easing in 2013. In short, investors continue to fear a return to the GFC and so any move to remove monetary support creates periodic bouts of fear. Several points are worth noting about this though. First, the Fed can afford to remain gradual in raising rates. Inflation is at the 2% target, wages growth is a long way from the 4% plus level that preceded past recessions and productivity growth is rising so this will keep growth in unit labour costs down. Meanwhile, intense competition and technological innovation are also continuing to help keep inflation constrained. 

Second, on any measure US monetary policy is a long way from being tight. The Fed Funds rate is zero in real terms, it’s well below nominal growth and the yield curve is still positive. 

Finally, a return to more normal interest rates is a good thing because it reflects a stronger, more normal economy. 

In short, expect gradual 0.25% Fed rate hikes to continue, with the next hike coming in December, and this will cause bouts of market volatility but it’s a long way from crunching the economy in a way that would bring on a deep bear market in shares. 

The US/China trade conflict

This issue has been periodically worrying markets since around March. It stepped up a notch after last month’s speech by US Vice President Mike Pence indicating that US gripes with China extend beyond trade which led many to talk of a new Cold War – the implication of which is less trade and occasional military tensions which implies lower economic growth and lower price to earnings multiples. However, it’s still not as bad as it looks. 

First, so far only 12% of US imports have been subject to a tariff hike averaging 15%, which is equivalent to an average tariff hike of 1.8% across all imports. So it’s a non-event compared to 1930 which saw a 20% tariff hike on all imports. 

Second, while initially the US seemed to be picking trade fights with all major countries it has since renegotiated trade agreements with South Korea and Canada/Mexico and is negotiating with Europe and Japan. This tells us Trump is not interested in trade wars with everyone and that he is not anti-trade per se but wants “fairer trade” for the US. 

Third, while Trump has threatened more tariff hikes on China if it retaliates it’s noteworthy that China has not fully retaliated and has been cutting tariffs and announcing more protections for intellectual property. This may help defuse the tensions a bit. 

Fourth, while Trump’s comments expressing optimism about a deal with China should be treated with scepticism as they came just before the US midterm elections, they do highlight cause for optimism that a deal will be reached eventually. At least Trump and Xi are talking and Trump’s optimistic comments ahead of the midterms effectively tells us that he is aware that the trade issue is harming the stock market and potentially the economy. The latter in turn suggests that he wants a deal well before he faces re-election in 2020. So, while it may be premature to expect a deal when Xi and Trump meet later this month, a deal is likely well ahead of the 2020 elections. With China already lowering tariffs, improving IP protections and softening joint venture requirements the outlines of a deal are starting to become apparent and Chinese Vice President Wang has indicated China is ready to negotiate with the US. 

The US midterm elections – no surprises

The US midterm elections saw the Democrats win control of the House and Republicans retain the Senate which was what had been indicated by the polls and betting markets. So, it provided no surprises - in contrast to Brexit and Trump’s 2016 win! While the Democrat House is likely to prevent Trump from cutting taxes any further it won’t be able wind back last year’s tax cuts, reverse Trump’s deregulation of the economy or change his trade policy. But there is some chance that Trump and the Democrats may agree on infrastructure spending. While the Democrat House will likely set up committees to investigate Trump and consider impeachment charges, it’s very unlikely to get the required 67 out of 100 senate votes to remove him from office unless he is shown to have done something really bad. All up, while there may be some skirmishes around shutdowns and debt ceilings, the midterm outcome could be positive because it means less policy uncertainty. 

On average the US resident has lost 29 House seats in his first midterm election. Clinton lost 54 and Obama lost 63. Trump looks to have lost around 34 but only needed to lose 23 to lose control of the House so what has happened is not unusual. What’s more the Republicans look to have increased their Senate majority so it’s not all bad for Trump. More broadly, it should be noted that “divided government” is the norm in the US. Perhaps the biggest risk is that Trump takes it personally and ramps up the populism, but if he wants to get re-elected in 2020 (which he does) then he won’t want to do anything that damages the economy and amongst other things this points to cutting a deal with China and getting the tariffs removed. Since 1946 the US S&P 500 has risen in the 12 months after all midterm elections – probably because the president starts to focus on re-election and so tries to boost the economy. 

US share market 12 months after midterm elections

Source: Bloomberg, AMP Capital

US tech stocks

Having accounted for a big chunk of US share market gains this year the US tech sector has corrected around 13%, but that still leaves it vulnerable to relatively high valuations (Nasdaq is on a PE of 42 times), sales growth slowing down for some of them and the prospect of increasing regulation. However, we have not seen anything like the tech boom euphoria of around 1999/2000 so a crash like back then is unlikely. Our base case is that the US share market will start to see a rotation from expensive tech to cheap cyclical stocks (with many trading on forward PE less than ten times). 

Eurozone worries – German and Italy

Fears that the Eurozone is about to blow apart causing financial mayhem threatening global growth has been with us since the Eurozone crisis that started in 2010. Lately the fear is that populist governments will take countries out of the Euro. This started with Greece in 2015. It was an issue last year but then pro Euro parties and candidates won in various elections. This year it’s been an issue with Italy particularly, as its populist government sought a wider budget deficit, and Germany with Angela Merkel indicating she will step down as Chancellor in 2021. In terms of Italy, there will no doubt be a conflict between the European Commission and Italy over the size of its planned budget deficit but don’t expect it to go too far as the deficit is not outlandish and German and France won’t want to embolden the Eurosceptics in Italy by pushing back too hard. 

In terms of Germany, the poor performances of the governing German grand coalition parties (the Christian Democratic Union (CDU), the Christian Social Union and the Social Democrat Party(SPD)) at state elections do not signal a threat to the Euro. First, comments by SPD leader Nahles indicate the grand coalition is not under imminent threat. Second, Germany’s budget surplus and falling public debt indicate plenty of scope to provide fiscal stimulus, which would be positive for Germany and the Eurozone and provide an electoral boost for the grand coalition partners. Thirdly, German Euroscepticism is not on the rise. In fact, support for the Euro in Germany has risen to 83% and it was support for the pro-Euro Greens that surprised in Bavaria and Hesse, not support for the Alternative for Deutschland. Finally, a new election is unlikely as both the CDU and SPD have seen a loss of support, so they aren’t going to support an early election. So those looking for a breakup of the Euro can keep looking.

Oil prices – back down again

In early October world oil prices reached their highest since 2014 with West Texas Intermediate topping $US76/barrel with talk it was on its way to $US100 on the back of strong demand and supply threats including impending US sanctions on Iran. This in turn was adding to concerns about the impact on global economic growth and rising inflation. However, since then the oil price has fallen by nearly 19%. US sanctions on Iran have started but with little new impact as Iranian oil exports had already fallen and the US granted waivers to allow eight countries - including Japan, China, India, Taiwan and South Korea - to continuing importing Iranian oil. The Iranian export cutbacks at a time of threats to production from Venezuela and Libya leaves a now tight global oil market at risk of higher prices, but for now the threat has receded a bit. 

 

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

--------------------------------------------------------------------------------------


Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.