Commodities crucial to sharemarket strength

August 2016

China’s slowdown could bring prices down, undermining the market rally.

The sustainability of share prices is largely down to the uncertain market for raw materials, writes Mark Rider.

Sharemarkets rose moderately in August along with investor complacency as volatility wasn’t a significant issue as winter came to an end.

The question now is whether growth will be sufficient to sustain this momentum for the remainder of the year.

At current levels, the market has priced an improvement in earnings following the bounce in commodity prices.

Central banks hold their ground

In the US, strong consumer spending and employment growth led to comments from US Federal Reserve chair Janet Yellen that there was a case for another interest rate rise.

While these comments weighed on markets late in the month, the Fed is likely to wait for concrete signs of inflation before lifting rates further.

In Europe, consumer sentiment remained strong and industrial production continued to improve. In Britain, the Bank of England cut rates and raised bond purchases to shore up business confidence.

Across in Japan, speculation continued that the nation’s central bank will announce further measures to stimulate growth. While the Bank of Japan’s monetary stimulus and low interest rates can support the market, it’s becoming increasingly difficult to identify catalysts for further market appreciation.

In China, broad-based measures of investment and spending signalled a slowdown in growth. Commodity prices may be at risk, especially at a time when the government looks to reduce over-capacity in steel, coal and industrial goods production.

Sources: Bloomberg, ANZ Wealth.

August’s interest rate cut by the Reserve Bank of Australia provided a further boost to the housing market, with property prices and auction clearance rates in major capital cities rising. Dwelling approvals also improved as low interest rates stimulate housing construction.

Meanwhile, employment remained firm as the transition towards non-resources growth gathers momentum, with the tourism, healthcare and services sectors performing strongly.

Major asset class performance - August (%)

Sector 1 mth 3 mths 12 mths 5 years
Australian shares -1.6 2.2 9.7 9.5
Global shares (hedged) 0.6 3.6 7.7 14.4
Global shares (unhedged) 1.3 -0.6 0.5 17.8
Global emerging markets (unhedged) 3.6 7.9 5.5 6.9
Global small companies (unhedged) 1.3 -0.2 1.3 18.9
Global listed property -2.5 6.2 21.2 14.4
Cash 0.2 0.5 2.2 3.0
Australian fixed income 0.4 2.5 6.2 6.2
International fixed income 0.1 2.8 8.9 7.2


Source: JP Morgan, ANZ Wealth

Indexes: Australian shares - S&P / ASX300 Accumulation. Global shares (hedged/unhedged) - MSCI World ex Australia. Global emerging markets (unhedged) - MSCI Emerging Free Net in AUD (unhedged). Global small companies (unhedged) - MSCI World Small Cap exAustralia. Global listed property - FTSE EPRA/NAREIT Developed Rental Index exAustralia (hedged). Cash - Bloomberg Bank Bill. Australian fixed income - Bloomberg Composite Bond All Maturities. International fixed income - Barclays Global Aggregate Bond Index (hedged).

Shares in global developed markets were up 0.6 per cent in hedged Australian-dollar terms. European shares led the way, up 1.2 per cent in local currency terms, while the British market (FTSE index) rose by 0.8 per cent thanks to a lower pound.

Emerging market shares rose 2.3 per cent in US-dollar terms on the back of reduced Fed rate hike expectations and a softer US dollar. Commodity-producing countries such as Russia, Brazil and South Africa continued to benefit from higher bulk commodity and oil prices.

Australian shares fell 1.6 per cent due to weaker financial and industrial sectors, which are most at risk of disappointing investors when it comes to earnings growth and dividends.

Global fixed income rose 0.1 per cent in August as bond yields remained low, while Australian fixed income was up 0.4 per cent as expectations of further monetary easing by the RBA provided support.

Currency markets also reflected the low-volatility environment. The US dollar softened against major currencies as expectations for US rate hikes were pushed out. However, the Australian dollar fell by 1.1 per cent as prospects for further cash rate cuts set in. This helped unhedged investments in the month. The New Zealand dollar was up 1.9 per cent following a bounce in milk prices and stronger investment inflows.

See the CIO Market Watch report for August