Key central bankers have maintained a softening tone in their outlook for monetary policy due to concerns about economic activity. This and the ongoing US-China trade dispute explain strong demand for safe haven assets including gold and government bonds during the quarter.
The yield on US 10-year bonds has fallen to a 30-month low at around 2.0 per cent, German bond yields are again slightly negative and Australian bond yields are at record lows below 1.4pc. Key equity markets continue to edge higher against this backdrop, suggesting valuations in key asset classes are struggling to find consensus on the economic outlook. Clearly these are abnormal times.
Investor expectations around growth, inflation and interest rates are clearly being re-set lower for longer. In Australia, the market is pricing in a further one to two RBA rate cuts in coming months, with some forecasts more bearish than that. High yielding equities (telco, banks, REITs) do look very attractive relative to a lower for longer rates scenario. However investors need to be very careful about the sustainability of the corporate cash flows supporting equity dividend yield expectations. Softening profit growth expectations continue to flow through domestic corporations.
Despite the abnormal environment, several factors provide comfort in the economic outlook:
- US growth while softening is still solid at around 2pc.
- US employment remains at multi-decade highs.
- Australian income growth (+3pc) is far better than headline GDP figures imply.
- Central bankers have signalled their intentions to combat any deterioration in the outlook.
Several geopolitical unknowns remain in play with key risks relating to prolonged trade tensions or a China growth shock. Overall, we continue to caution that investors should temper expectations of above-average returns in a low growth environment.
This backdrop supports cautious asset allocation settings. We've maintained our defensive tilts noting the economic unknowns which remain in play (trade, China, Brexit).
International - the importance of international diversification
The fading 'wealth effect' continues to weigh on the domestic economy as consumers and businesses adjust to weaker growth and falling house prices. A strong infrastructure pipeline may take some pressure off over the short term, but with businesses looking to conserve capital rather than re-invest, we think the medium-term outlook for growth will remain subdued.
Meanwhile, the US economy appears more positive even against the recent trade concerns with China. Indicators of employment and corporate confidence are still all at multi-year highs. With the Australian market representing just 2pc of world market capitalisation, we think it's prudent to diversify beyond the domestic market to access global themes and sectors that would otherwise be missed.
Investing offshore has never been easier with 147 ASX listed products available to choose from. The universe of global equity investment opportunities is vast, but researching and selecting the right shares to invest in is a challenging task for the typical investor. There are numerous indirect options for Australian investors to gain international exposure, with both managed and passive opportunities. There are a significant number of exchange traded funds (ETFs) with a broad range of exposures to global equities. These are passive investments designed to track the performance of a certain index. There are also a large number of unlisted actively managed funds offering exposure to a broad range of international markets and sectors.
Our preferred global exposures include: Magellen Global Trust (MGG), VanEck World ex Australia Quality(QUAL), iShares Global 100 (IOO).
- Boh Burima Financial Adviser (Authorised Representative: 000341081) Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410