Get ASX Price

 


  Latest Planning News
Hot Issues
Inflation undershoots in Australia
9 money mistakes to avoid in retirement
What a financial planner does to help.
Australia's vital statistics.
What kind of money parent are you?
How to save money
Federal Budget 2019 - Overview
How the 2019 Federal Budget affects you
New Global growth slowing, plunging bond yields & inverted yield curves
Women and Money
Market Update - March 2019
The problem with getting to 53 years of age.
How to avoid a travel debt hangover
Things to avoid as a newbie investor
Budget Time - How's Australia going?
Most older Aussies prefer home care over a nursing home
Why growth in China is unlikely to slow too far
10 money conversations to have when your relationship heats up
Australia slides into a 'per capita recession'
6 steps to get your money stuff together
All you need to know about how Australia is going.
Australian housing downturn Q&A
6 ways to reduce your credit card debt once and for all
5 life insurance questions you've always wanted to ask
2019 a list of lists - regarding the macro investment outlook
Part 4 - The major benefit of ‘behavioural coaching'
How to adult—a quick guide to personal finances in your 20s
How Australia is performing.
The Australian economy in 2019
Holiday budgeting tips— How to avoid a travel debt hangover
Australia - a comprehensive run-down of our vital statistics.
The Fed and market turmoil - the Fed turns a bit dovish but not enough (yet)
12 ways to avoid waste this Christmas
Rising US interest rates, trade wars, the US midterm election results, etc
Our Advent calendar for 2018
Responsible and ethical investing
What are the 3 biggest living expenses for households?
Your Adviser and Behavioural Coaching
Stop!! Don't do a paper Budget, use our online budgeting tools instead.
Information needed to be the BBQ expert.
Would you like to retire by 40?
The property cycle and the economy
How financial advice helps create wealth.
7 money personalities you may identify with or want to avoid
Are shares expensive?
How's Australia doing statistically?
Super investment options – what’s right for you?
Here's how to lead a happier life
What happened to all the worries about rising inflation and bond yields? Goldilocks, tariffs, Turkey & other things
Is it better to buy an investment property or home first?
Nine keys to successful investing
This information will turn you into a fireside expert.
How Australians will use their tax return
Lessons from the blue zones: secrets of a long life
Trumponomics and investment markets
Tools for budgeting, cash flow, Super and more ….
How tax deductible personal super contributions work
How much super should I have at my age?
The rise of the gig economy and side gigs (thanks to technology)
Statistics for all Australians
Watch out for tax scams
Now’s the time for tax planning
After the Australian household debt and east coast housing booms
Why it pays to contribute to your partner's super
Australia by numbers – Update
How to deal with financial stress – nearly 1 in 3 affected
Federal Budget 2018 – Overview
Your Budget
4 components of our 2018 Federal Budget
US China trade war fears – Q & A
Tools to help you manage your financial position are available on our site.
7 ways to boost your super
Australians reveal their priority goals
Australia by numbers – Update
Your retirement questions answered
How to make money by turning your unwanted goods into cash
Our website is really our digital office.
Bitcoin – is it really for you?
Spread your money, reduce risk
Love and money? It’s not about control
The pullback in shares - seven reasons not to be too concerned
Australia. All you need to know to be the expert.
Australian’s love affair with debt - how big is the risk?
5 ways to keep a cool head in a falling share market
2018 – a list of lists regarding the macro investment outlook
Sports lovers enjoy better financial fitness
Where Australia is at. Our leading indicators.
The year that was and the year ahead
Add some extra cash to your New Year
New year, new financial resolutions
Our Advent calendar for 2017
Where are we in the global investment cycle?
Australia's vital statistics
12 ways to enjoy summer without spending a fortune
One in three Aussies travel without protection
Digital payment options could see you spend more this Christmas
If you’ve always thought property prices only go up…
Will Australian house prices crash?
Where are we in the global investment cycle and what's the risk of a 1987 style crash?
Money steps for women
Resources on our site to help you, your family and your friends.
Australian Dietary Guidelines and healthy eating chart (PDF)
How to retire, your way
Prepare for retirement without missing out today
Be the boss of your cash
The Australian economy bounces back again
Should you lend money to family?
Money mistakes people make in their 50s and 60s
Australian Dietary Guidelines and healthy eating chart (PDF)
Eight steps to improved cashflow... and lifestyle
Powerful Budgeting, cash flow and Super Tools available on our site.
5 ways Australians will use their tax return this year
Australia's leading causes of death - ABS
The threat of war with North Korea
Six traits of Australians living the dream
The break higher in the Australian dollar is likely to be limited
Money can buy you happiness, you’re just spending it wrong
Key Economic Indicators, 2017 – updated
Helping your kids buy a home
From Goldilocks to taper tantrum 2.0
What’s your debt age?
Doing a budget is a good idea but ....
Planning is the key to making it financially
What to do when you come into money
Managing your money when you move in together
Reduce your bills with these household items
It pays to contribute to your partner's super
How to cope with losing independence
Transition to retirement income streams
The Australian economy hits another rough patch
Watch out for tax scams
The three core pillars of this year's budget
Federal Budget - 2017-18 - Overview
Federal Budget - 2017-18 - Budget documents
Make the most of the current super caps
Five, four, three… it’s not too late to get more in super
Super changes are coming
What’s your debt age?
Australian cash rate on hold
Super changes this financial year - Dr Shane Oliver - video
The door is closing on super’s current caps
Is Donald Trump's honeymoon with investors over?
Estate planning and why you need a super plan
What does a comfortable retirement look like?
Give your career a health check
Super changes from July 2017
Changes to the Age Pension assets test
Keep your money safe over the silly season
Looking ahead at 2017
Review of 2016, outlook for 2017 - looking better despite the political noise
Merry Christmas for 2016, a Happy New Year and a prosperous 2017.
54.2 million worries
Five tips for happy healthy ageing
Thinking about managing your own super?
Sending more to the tax office than you should?
Government pulls back on proposed changes to super
Market Update - What to consider when investing in a low return world
Stop!! Don't do a paper Budget, use our online budgeting tools instead.
Oliver's Insight - Megatrends
Value of Advice
A growing family doesn't have to blow the budget
Blinded by optimism
Thinking about managing your own super?
The investment outlook - it's not all that bad!
What’s your biggest obstacle to financial success?
Ageing Parents
Should you own the roof over your head?
Be a senior entrepreneur on your own terms!
Brexit and other key developments
Brexit wins
Commentary on major issues - AMP
Five money habits for a happy financial year
Are grandparents giving too much?
Remember to factor in parental subsidies at tax time
2016-17 Federal Budget - AMP
2016 Budget in detail
How (and why) to talk to your adult children about insurance
Procrastination: Just do it. Eventually.
Why Australian property won't collapse
The Lucky Country holding up pretty well
Have we reached the bottom?
The evolution of the Chinese consumer
Retirement rolls around faster than you think
Pressed for time?
Changes to the Age Pension assets test
Women are building financial intelligence
Heirlooms no more
Initial market falls precede stronger returns - Shane Oliver
What exactly is income protection insurance and do I need it?
A rough start to the year, which could have further to go
Aged Care - Changes to Assessment of Rental Income
A bump in the road, then a new start
New year, new start – are you ready for retirement?
Review of 2015, outlook for 2016 - Dr Shane Oliver
We wish you a Merry Christmas for 2015 and a Happy New Year
Go easy on the plastic over Christmas
Resolutions for a wealthy future
The Australian dollar doing what it normally does - overshoot. Dr Shane Oliver
How to manage volatility in a low return world
The Australian economy - more help will be needed. Dr Shane Oliver
Insurance through my super
Four tactics to build an investment portfolio
The demand for global infrastructure
Help achieve your investment goals with dynamic asset allocation
The Power of Budgeting
Jump retirement hurdles with a coach
Preparing for the time of your life
A Super Loan for all reasons
Making a smooth transition
Australian Government - Budget 2015
Budget 2015 - some professional opinions
Achieving a comfortable retirement
Is off-the-plan on the money?
Should I take my super as a lump sum or not?
Do you have a key person in your business?
Tips for success in a competitive job market
All you need to know about buying at auction
To sell or not to sell?
Saving in a material world
New Global growth slowing, plunging bond yields & inverted yield curves

Dr Shane Oliver
Head of Investment Strategy and Chief Economist
AMP Capital
 

 


Not terminal but shares are due a pull back.



       


 


Key points


  • The rebound in share markets since December has left them vulnerable to a short term pull back. 
  • Worries about global growth as evident in plunging bond yields and the flat/inverting US yield curve (and risks around trade) could provide the trigger. 
  • However, despite this we see this year as being a decent year for share market returns. The “great retreat” of central bankers back towards easier monetary policy, Chinese stimulus and a fading in trade war fears should see global growth pick up again into the second half and this should be positive for shares & other growth assets 

Introduction


The past week has seen a renewed intensification of concerns about global growth. Bond yields have plunged and associated growth worries have weighed on share markets. This note looks at the global growth outlook, why shares are vulnerable to a pullback and why it’s unlikely to be a resumption of last year’s downtrend. 


Background


But first some perspective. At their lows back in December global shares had fallen 18% from their highs with US shares down 20% and Australian shares down 14% and many were convinced that recession was around the corner. Since then share markets have staged an impressive rebound with global shares rising 18%, US shares up 21% and Australian shares up 14%. So the 2% or so fall in shares seen in the past few days is a bit of a non-event. 


Share markets well up from their December lows



Source: Bloomberg, AMP Capital


Late last year investor sentiment had become very negative and since then many of the fears that had depressed shares have faded: the Fed has become more dovish and less threatening to the US growth outlook; other central banks have actually eased notably in China and Europe; the Chinese authorities have shifted from cutting debt to stimulating growth; the US partial government shutdown has ended; the US and China look to be heading towards a trade deal; and fears around recession faded. And so shares rebounded.

However, after a 20% plunge as seen in US shares last year it’s unusual to have a deep V rebound like that since December, shares had become technically overbought & some measures of investor sentiment have become complacent. More fundamentally, there are several “worries” that could impact share markets – notably around growth. And this is being reflected in plunging bond yields & an inverted US yield curve. This has all left shares vulnerable to a short term pull back. 


Growth worries and plunging bond yields


The problem now is that while some of the worries from last year have faded, global growth looks to be continuing to slow. Particularly disappointing in this regard were March business conditions PMIs which showed falls in the US and Europe and continuing weakness in Japan (and Australia). 


Global Manufacturing & Services PMIs



Source: Bloomberg, AMP Capital


The weakness in growth indicators along with the “great retreat” back to dovishness and monetary easing by central banks aided by falling inflation has seen a renewed plunge in bond yields. 


Global bond yields falling again



Source: Global Financial Data, AMP Capital


This has seen US yields fall to levels not seen since 2017, German and Japanese bond yields go negative again and Australian bond yields fall to a record low. 

The decline in US bond yields has added to growth fears by pushing various measures of the yield curve to flat or negative. A negative, or inverted, US yield curve – ie when long-term bond yields fall below short-term rates – has preceded US recessions so it’s natural for investors to be concerned. The gap between the US 10-year bond yield and the 2-year bond yield has now fallen to just 0.22%, the gap between the 10-year bond yield and the Fed Funds rate has fallen to just 0.02% and the gap between the 2-year bond yield and the Fed Funds rate has fallen to -0.02%. 


US yield curve inversions and recessions



Source: NBER, Bloomberg, AMP Capital


But there are several things to allow for before getting sucked into the current frenzy around an inverted yield curve. First, the yield curve can give false signals (circled on the chart). 

Second, the lag from an inverted curve to a recession has been around 15 months. So even if it becomes decisively inverted now recession may not come till mid next year. Historically the share market has peaked 3-6 months before recessions, so it’s too far away for markets to anticipate. After US yield curve inversions in 1989, 1998 and 2006 US shares first rallied more than 20%. 

Third, various factors may be flattening the US yield curve which may not be indicative of an approaching US recession including the Fed’s new-found dovishness, negative German and Japanese bond yields holding down US yields, the realisation that central banks won’t be dumping their bond holdings and high investor demand for bonds post the GFC as they have proven to be a good diversifier – rallying every time shares have a major fall. 

Fourth, other indicators suggest that US monetary policy is far from tight – the real Fed Fund rate is barely positive, and the nominal Fed Funds rate is well below nominal GDP growth and both are far from levels that have preceded US recessions. 

Finally, we are yet to see the sort of excesses that precede US recessions: wages growth is still moderate, inflation is benign, there has been no boom in consumer spending, investment or housing construction, and private debt growth overall has been modest. It may also be argued that President Trump will do whatever he can to avoid recession next year as US presidents don’t get re-elected when unemployment is rising. 

So while the US yield curve may be flashing a warning sign and should be watched its shortcomings need to be allowed for and other indicators are not foreshadowing a US recession. This is important because the historical experience tells us that what happens in the US is critical to how deep share market falls get. Deep (“grizzly”) bear markets are invariably associated with US recession. Our view remains that US recession is not imminent and last year’s share market falls are unlikely to be the start of a deep bear market. 

More broadly, global growth is likely to pick up into the second half reflecting policy stimulus & reduced trade war fears. Signs of green shoots in terms of global growth include Chinese credit and investment, US data for retail sales, capital goods orders and consumer confidence and Eurozone industrial production. 


But what about the risks around global trade, Brexit and the Mueller inquiry?


These could cause a share market pullback but none look significant enough to cause a resumption of last year’s falls: 


  • US and China trade negotiations continue to see argy bargy but look to be on track to a significant deal in terms of reducing trade barriers and protecting intellectual property as it’s in both sides’ interests (particularly Trump’s who doesn’t want a trade war depressing the economy and shares and ruining his 2020 re-election prospects). But a deal with China would beg the question of whether Trump will then turn his attention to trade with Europe starting with auto tariffs. However, our assessment is that he probably won’t: America’s trade deficit with Europe is small compared to that with China; public and Congressional support for a trade war with Europe is low; most of Trump’s advisers are against it; the EU would retaliate and this would badly affect states that support Trump that export to Europe; it would be a new blow to confidence and share markets ahead of Trump’s 2020 re-election campaign.
  • The Brexit soap opera continues to create huge risks for the UK but it’s a second order issue globally. 46% of UK exports go to the EU but only 6% of EU exports go to the UK, so Brexit means far more for the UK economy that it does to the EU! Given the threat to the UK economy, the issue around the Irish border and that the 2016 Brexit vote was around immigration and sovereignty but not free trade with the EU, a soft Brexit or no Brexit (after another referendum) is more likely than a hard or no deal Brexit. What happens in the Eurozone though is far more significant than Brexit.
  • Finally, despite the hopes of Democrats it looks like the Mueller inquiry has failed to come up a smoking gun significant enough to see Trump removed from office.

What about Australian bond yields at a record low?


The plunge in Australian bond yields to a record low of 1.78% (below 2016’s low of 1.81%) reflects a combination of weak economic data locally causing the fixed interest market to price in RBA rate cuts and falling bond yields globally. We remain of the view that Australian bonds will outperform global bonds (reflecting RBA easing at a time of the Fed holding) and that the Australian share market will continue to underperform global shares (as earnings growth locally lags that globally in response to weaker economic conditions in Australia). We continue to see the RBA cutting rates twice this year. 


Concluding comments


Share markets are due a correction or pullback after rallying strongly since their December lows and worries about inverted yields curves and the growth outlook could provide the trigger. But US and global recession still looks to be a fair way off and we continue to see this being a reasonably good year for shares. The continuing fall in bond yields is not necessarily inconsistent with rising share markets (in 2016 shares bottomed in February and bond yields didn’t bottom till July/August!) but it does highlight that the post GFC environment of constrained growth and inflation and low rates remains alive and well. 

 



Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.