Investment update 30 April 2018

Last week in the markets

Over the past week Australian shares rose 1.5% with small company shares up 0.8%. Shares in developed countries fell 0.2% while the US market was flat. Shares in emerging markets were down 1.0%. The Australian dollar fell 1.2% to 75.81 US cents. The Australian 10-year bond yield increased slightly to 2.82% while the US 10-year bond yield remained at 2.96%. The oil price fell 0.4% to 68.38 US dollars per barrel.

Updating our economic views

Over the past two weeks we have detailed our core global economic scenario, “Late stage synchronised growth, well managed”, and our secondary scenario, “Late stage synchronised growth, policy mistakes”.

There are also other global economic scenarios that we consider, although we believe their likelihood to be much lower. These are detailed briefly below:

  • “Golden era” – Current positive global growth continues in the short term supplemented by productivity gains from technology, creating a positive longer-term growth environment.
  • “De-coupled growth” – Despite attempts to the contrary, Japan and Europe can’t escape their demographic profiles, which aren’t conducive for growth, nor the constraints of their own economies. Japan has extremely high government debt while Europe is constrained by the EU’s rigid rules on government borrowings.
  • “Japanification” – Recent economic growth proves a false dawn. The world reverts to below-trend economic growth due to low population growth and low productivity gains.
  • “China hard landing” – China fails to control excesses in its economy, specifically those related to housing, investment and corporate debt. These bubbles pop and China’s economy dramatically slows, with a sizable impact on global growth.

Scenario analysis is an important portfolio construction technique. For each of the six global economic scenarios we have detailed over the past few weeks, a different portfolio would be ideal. We aim to construct portfolios which perform well across a range of economic scenarios.

Signing off

David Bell | Chief Investment Officer

 

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

Data sourced from Bloomberg.