Stocks depend on monetary policy

Market Watch September 2016

Renewed belief in central bank action kept markets confident.

Another positive month for sharemarkets continues to show how overvalued shares are, writes Mark Rider.

Sharemarkets dipped in early September, weighed down by concerns that central banks may be withdrawing stimulus measures in the near future.

These concerns eased when the US Federal Reserve (Fed) decided to keep interest rates unchanged, and the European Central Bank (ECB) and Bank of Japan (BoJ) reaffirmed their asset-purchase programs. This renewed confidence lifted sharemarkets, delivering modest gains over September.

US and Europe more upbeat

In the US, economic data remained soft, but inflation measures were generally stronger. Despite the Fed leaving interest rates unchanged, the bank’s monetary-policy setting branch, the Federal Open Market Committee, was more upbeat on the underlying strength of the economy, with better jobs growth supportive of a rate hike in December.

In Europe, growth indicators continued to pick up as business sentiment improved, while the British political climate stabilised following the re-election of Labour leader Jeremy Corbyn.

Japan’s central bank reaffirmed its commitment to asset purchases after conducting its comprehensive review on monetary policy.

In China, weaker data flow in August saw the State Council (China’s central body for fiscal policy implementation) commit to bring forward public works investments, which supported industrial activity and steel prices. Meanwhile, measures of private-sector investment remained soft, and rampant credit growth caught the attention of Western media.

A new boss for the RBA

After a review of monetary policy by its new governor, Philip Lowe, the Reserve Bank of Australia (RBA) is now armed with greater flexibility to meet its medium-term inflation target. This has reduced market expectations of further rate cuts, despite soft underlying momentum across the domestic economy.

In particular, forward-looking industrial indicators have declined, along with housing finance and consumer confidence. But this was offset by continued strength in the jobs market and the service sectors, including tourism and healthcare.

Shares looking increasingly expensive

After another positive month for sharemarkets, Australian, international and emerging market shares are moderately “overvalued”, as shown in Chart 1. With prices out of step with softer economic growth and tepid corporate earnings, the risk to sharemarkets continues to rise. This is something we’ll be keeping a close watch on in the coming months.

Overvalued sharemarkets


Sources: Bloomberg, ANZ Wealth.

Asset class summary for September

Global developed market shares were up 0.3 per cent in hedged Australian dollar terms. European shares were up 0.1 per cent in local currency terms as sentiment remained strong, while British market (FTSE index) rose by 1.7 per cent as political stability and better growth prospects encouraged investors.

Emerging market shares rose 1.1 per cent in US-dollar terms, as sentiment improved thanks to reduced Fed rate hike expectations and stronger commodity prices.

Australian shares rose 0.5 per cent, with the resources sector outperforming following better economic data in China and rising commodity prices.

Global fixed income produced a return of 0.1 per cent with bond yields staying low, while Australian fixed income fell 0.2 per cent as rate-cut expectations fell.

In currencies, the US dollar fell against most majors with the Fed keeping rates on hold, while the Australian dollar rose by 2.0 per cent following better data from China. This impacted unhedged returns in the month.

Major asset class performance - September (%)

Sector 1 mth 3 mths 12 mths 5 years
Australian shares 0.5 5.2 13.5 11.0
Global shares (hedged) 0.3 5.1 11.8 15.9
Global shares (unhedged) -1.3 2.0 2.0 17.3
Global emerging markets (unhedged) -0.5 6.1 7.2 8.1
Global small companies (unhedged) -0.4 4.3 4.5 19.3
Global listed property -1.5 0.6 16.6 16.4
Cash 0.1 0.5 2.2 2.9
Australian fixed income -0.2 0.9 5.7 6.0
International fixed interest 0.1 0.8 8.2 7.0

Source: JP Morgan & ANZ Wealth

Indexes: Australian shares – S&P/ASX 300 Accumulation; global shares (hedged/unhedged) – MSCI World ex Australia; global emerging markets – MSCI Emerging Free Net in AUD (unhedged); global small companies (unhedged) – MSCI World Small Cap ex-Australia; global listed property – FTSE EPRA/NAREIT Developed Rental Index ex-Australia (hedged); cash – Bloomberg Bank Bill, Australian fixed income – Bloomberg Composite Bond All Maturities; international fixed income – Barclays Global Aggregate Bond Index (hedged).

Please note: Past performance is not indicative of future performance