Hedge Clippings | Friday 22 March, 2019

In amongst the global political issues we cover each week, such as Trump (hasn't he been a gift that keeps on giving to the media?) and the political and economic train smash that is Brexit, today we're taking a look at equity markets over the first couple of months of 2019, particularly as everything was looking so grim at the end of December following the final quarter of 2018. For answers, take a look at US treasury prices and yields;

Last year it looked inevitable that US bond yields would keep climbing past 3.5%, and in doing so accept they would spoil the equity bull market party. Which duly happened, with the S&P500 falling 13.5% on a total return basis in Q4, and the ASX200's equivalent fall of a less severe 8.24%. Meanwhile this year's rally has been caused by sharp falls in bond yields, which has seen the US equity market pretty much recover all of the Q4 fall, whilst the ASX has done the same, plus some, to be up around 10.5% YTD.

Then along comes this week's US Fed meeting and the release of the now well publicised "Dot Plot", where the unanimous view of all members of the FED effectively ruled out the chances of any further tightening in the US for the remainder of 2019. To do so across all 12 members, and this early in the year, is unusual to say the least. However, it does point to a significant U turn, not only in Fed policy, but their outlook for the US economy.

As such, in this environment finding outperforming funds has not been easy. While over 40% of funds in AFM's database provided positive returns over the past 12 months, only around 9% have outperformed the ASX200 on a total return basis.

Lesson one and two when selecting funds: Choose carefully, and diversify!

Meanwhile, back in Australia there's mounting pressure for a cut from the RBA, in part to save the residential property market, with some so-called experts, who this time last year had failed to call the inevitable decline, now jumping on the bandwagon predicting further falls of up to 20%.

Bob Dylan once sang (ok, "singing" might be a loose interpretation) "you don't need the weatherman to know which way the wind blows". The bottom line, and economics class 101 (from my dim and distant memory), is that the price of anything is determined by the balance (or imbalance, as the case may be) between supply and demand. In the current housing environment the supply side of the equation is significantly the availability of credit, in part thanks to the spotlight from the Hayne Royal Commission, while the demand side includes a reduction of Chinese buyers and at the same time the rest of the market not wanting to try catching a falling knife.

However, back to the geo-political outlook - NO ONE can predict where or how Brexit ends up, with both the UK and Europe both likely to lose as a result, while the Trump-Xi arm wrestle looks like it will extend into a long campaign, again with each party taking some yet to be determined collateral damage.

No wonder markets, and more significantly the FED, are seeing a deterioration in the outlook for the US, and for that matter, the global economies.

Hedge Clippings | Friday 15 March, 2019

Talking, talking, talking. Sooner or later you've got to walk the walk.

Is there any point in talking any more about Brexit? It would have contributed more column inches (that's how they measured media coverage prior to TV, the internet, and social media) on any subject since the end of WW2, but without a victory, or a clear winner. 

Whatever the outcome there are losers galore (UK, Ireland, Europe, and subsequently global trade and economic stability). Winners? A Pyrrhic victory ("a victory won at too great a cost to be worthwhile for the victor") for Boris maybe, but he went AWOL while the going was good and is either keeping his head down, or his powder dry, and will emerge after Mrs May - who must be one of the most resilient (even if not the most popular) leaders since Winston Churchill - meets her eventual end.

We actually thought we'd seen (or heard) the end of talking about, or at least the demise of, the phenomenon of negative yielding bonds last October. However it appears not, with Bloomberg reporting that there's been a 60% increase over 5 months with the Bloomberg Barclays Global Aggregate Negative-Yielding Debt Index increasing in value by over $3 trillion in that time to reach $9.3 trillion - albeit well below the all-time record of $12.2 trillion in June 2016.

The concept of negative yields seemed impossible a couple of decades ago, as would Australian 10 year yields below 2% as they are now. However, as an indicator of future economic growth they tell a story worth listening to, both globally and in Australia where we might just see a risk to the crown of 30 odd years of uninterrupted economic growth. Speculation that the next move in RBA rates will be downwards is mounting, which, while it may please the under pressure property industry, doesn't auger well for the economy as a whole.

Meanwhile, talking of China, another Bloomberg report we noted this week concerned the fact that their economic slowdown deepened in the first two months of 2019, with unemployment sharply higher, industrial output posting its worst start to a year since 2009, and retail sales expanding at the slowest pace since at least 2012 even though investment in real estate rose to its highest since 2014. We're not sure the Chinese slowdown is entirely due to the Trump/Xi negotiations, a resolution of which has been postponed further, but it certainly won't have helped. It could be the sign of a maturing economy, or a slowdown in the migration of the rural farm worker to the industrialised cities, or the overall global slowdown.

Then again these are Chinese economic figures based on the two months to the end of February, amazingly collated across a population of 1.2 billion, and released in just 14 days.