Alex Cathcart, CFA, Economist – Portfolio Manager Support, Investment Strategy
2015 was not a good year for global shares and the start of 2016 unfortunately hasn’t been any better. Optimism about the global economy and markets is becoming harder to find. Expectations for long-term cash rates and economic growth have been almost continually revised lower since the end of the financial crisis.
While there is more art than science in trying to attribute causes to market actions, we think the most recent sell-off in shares reflects a number of competing concerns. Specifically, markets are concerned by the China’s seemingly inconsistent policy response to the slowdown in their economy, particularly with respect to currency markets. In addition to this, falling commodity prices are having a negative impact on the expected earnings of companies in the energy and materials sectors which in turn is hurting their prices. Finally, there is concern that if growth in developed economies is slowing, monetary policy won’t be able to respond effectively given cash rates are already at very low levels.
An economy’s cash rate is the basis on which other interest rates are set. The cash rate influences the price of borrowing and in turn economic activity and inflation. Right now a key question is how cash rates will evolve in the future and the impact of this on economic growth. Persistently low interest rates would also meaningfully affect asset returns, with low cash rates being the primary driver of the low-return environment we’ve talked about previously.
Our view is that interest rates will rise slowly, probably to a rate lower than normal over our forecast horizon. In the US for instance this means the Federal Reserve (the US central bank) should be able to increase interest rates modestly without damaging the economy. Growth in developed markets should remain satisfactory, but low by historical standards. As a result, we expect cash rates to rise only slowly and remain relatively low for the next couple of years.
In terms of the broader outlook, 2016 will probably be another volatile year for markets. Weak commodity prices, the China slowdown and tighter US monetary policy (and financial conditions as the USD rises) are likely to continue to weigh on many emerging economies. Developed world growth will probably remain relatively robust, although could moderate somewhat in line with the global manufacturing slowdown and country specific outcomes. China remains the biggest short-term risk to the outlook. We see a moderate probability that growth could decelerate sharply in China due to a policy error or if the services sector can’t grow fast enough to account for the slowdown in the investment and manufacturing sectors. We will keep a close eye on these developments.
In the meantime we continue to take a disciplined approach to managing the portfolio. We understand that periods of market volatility can be concerning and if you’re thinking of reviewing your investment strategy we encourage you to track how your options are performing over longer time frames, rather than over shorter periods. Short term returns provide limited information about how your super is tracking overall. Performance data can be found on the Investments section of our website. And as always we advocate caution about making short-term decisions with a long-term investment. A financial adviser can help you choose an investment strategy appropriate for your needs or for specific QSuper advice, check out QInvest 1.
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The views of the author and those who provide the responses to comments posted on this blog are not necessarily the views of the QSuper Board. We’ve put this information together as general information only. You should get professional advice before relying on this information.
Past performance is not a reliable indicator of future performance. Each of our investment options has a different objective, risk profile, and asset allocation.
Economist – Portfolio Manager Support, Investment Strategy
Alex is responsible for forecasting major global economies, monitoring global economic and financial market conditions, and providing support to the portfolio managers.