The current market environment is dividing global markets with clear winners and losers:
The four regions to watch:
China – the equity bright spot
- Has seen three rate cuts in the past six months. Stimulus has assisted investing and expectations are building that a fourth is not far off as well.
- Beijing has brought forward another infrastructure project on top of the projects brought forward midway through last year - creating billions of dollars of spending and employment.
- Property continues to slow as new rules curtail borrowing for second and third homes
- Investment in mainland China is now pouring into equities
Getting exposure to China remains a key call in the current market conditions
Europe – Sovereign risk plays
- Rumours are mounting the ECB will accelerate its €65 billion-a-month bond buying programs, by front-loading the programs to increase European economy activity.
- Greece is becoming a positive risk as both Angela Merkel and Francois Hollande want the country to remain in the EU, suggesting a deal is more likely to occur than not.
- The ECB and Greece will see EUR/USD declining and heading back to parity over the medium term, increasing European competiveness
The US – valuation
- The US is into its seventh consecutive year of gains – driven by mass central bank stimulus. However, it has never managed seven consecutive years of gains in its 150 plus year history
- Record highs for the DOW and S&P and 15 year highs for the NASDAQ see value being questioned
- Fed members are cautioning that the run in both the bond market and equity markets is a risk and one that may need to correct to find longer term stability.
- Growth and inflation in 2015 has stalled (and possibly contracted)
- Employment, however, is heading back to historical lows and the housing market is back to pre-GFC levels.
- Will raising the Fed funds rates create ‘taper tantrum’ 2.0 as valuations catch up on price?
Australia – Bank heavy
- The ASX at one point this year was up over 8%. However, as the yield trade has been questioned and the AUD starts to move higher even with two rate cuts - the carry trade is evaporating and the risk premium in the ASX appears too great for both domestic and international investors.
- The banks remain the biggest concern – all have technically corrected and even so are fundamentally still expensive on a price to book and price earnings perspective.
- The banking sector makes up 29.85% of the ASX 200 - 26% of that is the big four.
- Iron ore and oil are both reversing after bouncing in the past six weeks adding to the downside risk for the index after seeing a solid recovery in materials and energy sectors. As the three tables above illustrate, the ASX is being left behind once more as its appeal as a yield and cyclical trade destination are a decline on fundamentals.
Ahead of the Australian open
Fairly indifferent leads for the ASX 200 from last night’s trade - we are currently calling the market down a solitary point to 5614 based on the futures market. Iron ore and oil both fell again overnight as iron finally gave up on the resistance at US$60, so I suspect the slide in market to unfortunately continue.