Investment update 5 March 2018

Last week in the markets

Over the past week Australian shares were down 0.8% with small company shares down 1.7%. Shares in developed countries fell 2.4% with the US market down 2.0%. Shares in emerging markets were down 2.8%. The Australian dollar fell 1.1% to 77.60 US cents. The Australian 10 year bond yield decreased to 2.73% while the US 10 year bond yield fell slightly to 2.86%. The oil price fell 3.6% to 61.25 US dollars per barrel.
  

Longer term considerations

At Mine Wealth + Wellbeing, our purpose is to deliver exceptional retirement outcomes. This is a ‘long horizon’ problem. From an investment perspective we manage portfolios to deliver long-term outcomes. We determine our own long-term asset allocation, known in the industry as “strategic asset allocation”, have a dedicated economics committee and utilise the services of a leading global economics consultant. Our view is that it is very hard to forecast short-term market movements and accordingly focus most of our efforts on positioning our portfolios for the long-term.

Over the past week a couple of important geopolitical developments have emerged which may have an impact on market performance over the long-term.

The first was an announcement by President Donald Trump that the USA would introduce trade protection for its steel and aluminium industries, in the form of a 25% tariff on steel imports and 10% on aluminium. This will likely create global trade wars; indeed, other trading blocs have already outlined their intentions to retaliate. Economically, trade wars create some winners in the short-term but over the long-term, the world loses out as products and services aren’t manufactured at their most efficient price. Losing takes the form of higher prices, higher unemployment and lower profits.

The second development is the recent decision in China to remove presidential term limits from its state constitution. This creates the scenario where President Xi Jinping might remain in power indefinitely, with power determined by decisions among key power brokers behind closed doors. While some sources claim this is bad for China’s economy, we would say it’s too early to say. We are cautious that western media may have a negative bias to the way it reports on Chinese politics. This could be because its political structures are different to those that western media are familiar with.

Nonetheless the dual model of increasingly open markets and greater democracy, a mainstay of the past 30 years, is challenged by these recent developments. This period, overall, has been very good for markets, both shares and bonds. It’s important not to mistake ‘correlation for causation’, but we are always reflecting on how changes in economic structure will flow through and impact investment markets over the long-term. 

Signing off

David Bell | Chief Investment Officer

 

Past performance isn't necessarily an indicator of future performance.

Data sourced from Bloomberg.