ECONOMIC & MARKET COMMENTARY MARCH 2016 Elevators An escalator up, and an elevator down market proverb This proverb is based on the tendency for risk assets (originally shares, but applying equally to assets strongly correlated to them) to rise slowly for a long period before sudden, sharp corrections. Look at the S&P500 from the start of the 2003-07 recovery all of the gains were erased in the GFC, with most of that in a couple of months: Something unusual happened in February-March. Risk assets such as resource stocks, credit and shares shot up, having suffered a slow burn over the previous 6-12 months. The proverb suggests investors have plenty of time to wait for calm, and then buy ahead of a long rising market once stability is clear. That did not happen this time. While investors are rarely forced buyers, many hedge funds had sold / shorted and were forced to cover. Credit securities followed indices, and commodity stocks that were sold on the anticipation of bankruptcy took off as the commodities themselves moved higher.
For investors, even a rising market could be painful. Hedge funds were squeezed terribly, and generally performed poorly in March s rebound. There was a severe underperformance in quality as a style (even where not part of a long-short hedge fund). Many fundamental investors were reducing their positions at once. That was good for managers with long-suffering holdings in Resources leaders. High to low, bonds had another alarming selloff by month end, they had somewhat recovered. The biggest problem for investors is that they did not have time to get set. Investors looking to allocate to major bank credit may have only had a single new issue opportunity. Anyone looking to speculate on commodity stocks saw many double within the space of a few days. We do not encourage investors to be overly cute with market timing. It requires being right twice knowing that a market will fall, and then knowing again when it stopped. The same goes for timing management styles. Anyone who picked the 1987 crash perfectly watched from the sidelines as the Dow Jones index fell from 2700 to 1700. But unless they also identified a reentry point, they watched it recover and then go on to 18000. CPG Research & Advisory 2
International Data was more positive in March. Central banks guided even easier policy to boost sentiment. Commodities led a sharp recovery. The US S&P 500 and Down Jones gained 4.96% and 5.39% respectively. The NASDAQ surged 7.82%. The MSCI World ex-aus returned 5.40% while the MSCI Emerging Markets Index finished up 5.22% (both in local currency). Other Highlights The US economy added a stronger 242,000 jobs after some late 2015 weakness, although higher participation took the unemployment rate back up to 5%. The final GDP reading for Q4 was revised up to +1.4%, and business confidence turned above 50 again. Inflation remained within target. This spooked bonds early in the month, with US 10-year bonds almost hitting 2% before recovering to close at 1.78%. With core CPI rising from 1.3% to 1.7% in 6 months a breach of 2% is no longer unthinkable. A three-day IMF event in New Delhi promoted the continuation of unconventional monetary policies accompanied by structural reforms and low inflation. Emerging market policy makers were more sceptical of the benefits. With Japan s economy shrinking in Q4, manufacturing sentiment fell to a 3-year low. Negative rates are also thought to hurt bank margins. China s foreign exchange reserves shrank another $US28.57bn in February, with smaller intervention to defend the RMB. Production rose by only 5.4% for the January- February period, again the worst growth since 2008. Retail sales also fell short of expectations, growing by 10.2%. As the UK debates an exit from the Eurozone, the government has announced further spending cuts. The British Chamber of Commerce (BCC) downgraded the growth forecast of the UK economy to 2.2% from 2.5%. Industry modelling suggests an exit vote could cost almost 1m jobs and 3% of GDP by 2020. EU GDP held at +1.6% p.a., the best since 2011 as was unemployment at 10.3% and the 22% youth unemployment rate. Domestic The RBA kept the cash rate unchanged at a record low 2% in March. The board commented on a sustained low inflation outlook. Citing an improving non-mining economy suggests the RBA is on hold but with scope to react to future weakness. The current account deficit worsened from $18.8bn in Q3 to $21.1bn in Q4, seasonally adjusted, with a January trade deficit of -$3.364bn setting a new cyclical low in trend terms. Manufacturing achieved its strongest growth in 6 years, aided by lower commodity input costs and a low $A. Job vacancies were up +13.4% on the year, but housing finance slumped -4.3% for owner-occupiers in January. Queensland added another $500 million infrastructure plan focusing mainly on roads and rail projects. The May budget was moved forward by a week, to allow for a potential election trigger bill to be debated. If the legislation for a building industry regulator is rejected, an early double dissolution election will occur on July 2 nd. The ANZ-Roy Morgan consumer confidence index fell 0.3% at the end of March, remaining above its long-run average as employment was solid and interest rates low. New home building approvals fell 7.5% for January with a 6.0% fall in detached dwelling approvals. A 10.8% fall in apartment blocks and townhouses took them down -26.7% on the year. The population grew +1.3% over the year. Australian 10-year bond yields closed higher at 2.49%, up +9bp for the month, following global yields. Commodities and Currency The $A closed higher at US76.57 cents, surging from US71.40 cents. WTI Crude Oil closed higher at $38.19/bbl (+13.16%) after setting new cyclical lows earlier this year. Reports of record US stockpiles were offset by reports of Iran strategising with OPEC. Gold closed the month relatively flat at around US$1,230, up over 17% since its cyclical low in late November. Iron Ore closed at $52.00 (up +6.45%) with producers like Fortescue trading at double recent lows. Base Metals remained mixed throughout the month. The gainers were Copper (+5.32%), Zinc (+0.56%) and Tin (4.29%). Aluminium lost -9.23% while nickel was slightly lower by -0.12%. CPG Research & Advisory 3
KEY FINANCIAL MARKET DATA AS AT 31 ST MARCH 2016 (UNLESS SPECIFIED) CPG Research & Advisory 4
1 Growth Assets 0% - 20% 2 Growth Assets 21% - 40% 3 Growth Assets 41% - 60% 4 Growth Assets 61% - 80% 5 Growth Assets 80% - 100% For any queries, please contact: Name Title Phone Email Andrew Vallner Managing Director (02) 8246 8805 andrew.vallner@cpgadvisory.com.au Michael Chandra Advisor Fixed Interest (02) 8246 8812 michael.chandra@cpgadvisory.com.au Disclaimer The information provided in this document is meant for the general interests of clients of CPG Research & Advisory only and does not constitute a recommendation or an offer to invest. This document does not take into account the investment objectives, financial situation or particular needs of any particular investor. Before making an investment decision or acting on any of the information or recommendations contained in this report, the investor should consider whether such recommendation is appropriate given the investor s particular investment needs, objectives and financial circumstances. We recommend you consult your CPG Research & Advisory adviser for advice that addresses your specific needs and situation before making investment decisions. All information and recommendations expressed herein constitute judgements as of the date of this report and may change without notice. CPG Research & Advisory 5