Investment update 29 January 2018

Last week in the markets

Over the past week Australian shares were up 0.7% with small company shares rising 1.1%. Shares in developed countries rose 1.9% with the US market up 2.2%. Shares in emerging markets were up 3.3%. The Australian dollar increased 1.4% to 81.10 US cents. The Australian 10 year bond yield fell to 2.85% while the US 10 year bond yield was unchanged at 2.66%. The oil price was up 4.4% to 66.14 US dollars per barrel.

Bananas and avocados

On the morning of 20 March 2006 Tropical Cyclone Larry crossed the north Queensland coast near Innisfail and wreaked havoc. Fortunately, no lives were lost but there was extensive damage to crops and infrastructure. Nearly all of Australia’s banana crops were wiped out.

As a result, prices for bananas sky-rocketed, with official reports citing price rises of 406%. Demand for ‘staple fruit’ substitutes, such as apples, rose increasing their prices as well. Inflation, driven by bananas and petrol prices, rose significantly during this time, touching 4% which is well outside the Reserve Bank of Australia’s (RBA) target range of 2% - 3%. The RBA raised interest rates three times during 2006 as they tried to balance good economic growth against concerns around controlling inflation. To say the RBA raised interest rates because of banana price rises would be misleading; there were a range of factors. Indeed, the RBA looks through short term issues, such as lost crops, and focusses on the medium term.

Recently you might have read stories about price rises for avocados. Are there similarities? The obvious similarity is that the price of a piece of fruit has increased. However, the drivers are different: the banana price rise was a supply shock whereas for avocados it’s due to strong and increasing demand.

Could avocados be a catalyst for the RBA increasing interest rates? Unlikely – fruit makes up about 1.6% of the basket of goods and services used to measure the Consumer Price Index (a measure of inflation). The increase in prices has not carried across to other fruit categories. 

Finally, how does this tie back to the comment by demographer Bernard Salt, who started an international storm by claiming (a little tongue in cheek) that if young people stopped going to ‘hipster cafes’ and paying for expensive smashed avocado breakfasts, they could purchase property? It all depends on the demand response. Smashed avocado prices are on the rise at cafes, with apologies written on blackboards. Will the demand fall so people save more or will buyers remain unperturbed and simply spend a greater proportion of their weekly budget on a nice healthy breakfast? Only time will tell.

Signing off

David Bell | Chief Investment Officer

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

Data sourced from Bloomberg, Australian Bureau of Statistics, and Reserve Bank of Australia.