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September Quarter - steady as she goes

September Quarter – “steady as she goes”

Considering the volatile economic and political times we are going through, Australia’s sharemarket turned in a very respectable “steady as she goes” performance in the September quarter of 2019.

The all important ASX200 index closed the September quarter at 6688 which was up 0.8 of one per cent on the June 30 number.

But it was up 8.36 per cent on the previous equivalent September quarter close, and in terms of its 2019 performance overall, it is still up almost 20 per cent from the December 2018 close of 5597.2.

So, is it all just pessimistic noise out there? No.

During the quarter the US bond market briefly featured what’s called a yield inversion, in which the yield on two year bonds exceeded the yield on the ten year bonds. That’s regarded as reliable indicator of a forthcoming recession, although it’s not always clear how long the market will have to wait for one.

Every single US recession since 1950 has been preceded by an inversion, since inversions are generally an indication that the markets don’t trust where the US economy is going.

Meanwhile Brexit hangs like an albatross around the UK, Hong Kong arguably gets worse by the day and of course President Trump’s sabre rattling towards China over trade is not helping confidence one little bit.

And 70 per cent of Euro government debt is now offering a negative yield. Meaning that if you deposit $100 with an issuer, you can expect to get somewhere just above $99 back, which could mean money leaves the banking system.

That’s a consequence of the “race to the bottom” on interest rates around the developed world, some of which has rubbed off on the Australian economy where Treasurer Josh Frydenberg is trying to balance the books at the same time as Reserve Bank governor Philip Lowe wants wages to rise so consumers spend more.

It’s not a perfect outlook but then it seldom is.

Governor Lowe addressed a dinner in Melbourne on October 1 at which he pitched an upbeat note.

“ The Australian economy appears to have reached a gentle turning point,” he said.

“The economy has been through a soft patch recently, but we are expecting a return to around trend growth over the next year.

“There are a number of factors that are supporting this outlook.

“These include the low level of interest rates, the recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some established housing markets, and a brighter outlook for the resources sector.

“Together, these factors provide a reasonable basis for expecting that the economy will remain on an improving trend from here.”

You could argue his job is to talk up the economy, particularly as he wants consumer confidence to pick up, but there is merit in his comments.

Does that mean the equity market will go up? There are two countervailing forces at work here. One positive force is that investors are hoeing into stocks in the hope of getting a better return from them than from fixed interest, while the negative force is that our market will be carried along on whichever wave dominates globally.

Given that list of worries, there’s room for a lot of pessimism, but the actual performance of our stocks, particularly financials, has in recent weeks been steady to positive.

One worthwhile consideration is that it may be worth looking at value in stocks rather than growth potential, at least in the short term, because growth prospects are modest.

 

By Andrew Main,  www.einvest.com.au.

This article is the opinion of the Andrew Main and is not financial advice.