31 March 2016
Themes For March
Markets have experienced a volatile ride so far in 2016 with a poor start to the year followed by a “V” shaped recovery from mid February. Share markets continued their impressive rebound from February’s lows to post healthy gains for the month of March, effectively returning to their levels from the beginning of 2016. The US equity market had a strong month up 6.6% while European markets were a little more subdued up 2%, led by Germany up 5% while the UK market was up only 1.3% reflecting concerns about the potential for a European Union exit or “Brexit”. Across Asia, Japan was up 4.2% recouping some of last month’s losses, China was up a healthy 9.8% and here in Australia the market was up a modest 3.3%. Bond markets were flat to slightly weaker with the yield for most government bonds up a few basis points for the month. US 10 year bonds rose by 6bp to 1.77% while in Australia 10 year bonds rose by 9bp to close the month yielding 2.49%. The oil price continued its recovery from its January lows rising a healthy $4.6 per barrel to finish the month at $38.34 for West Texas Intermediate crude. Iron ore also rebounded and despite record shipments from Port Headland, the spot price finished 23% higher for the March quarter. In currency markets, the $A staged a strong rally up over 5 cents against the $US to finish at 76.6 fuelled by the rebound in commodity prices and a more subdued outlook for US cash rates. Elsewhere, the Yen & Euro have continued their strength against the greenback frustrating their Central Banks that are attempting to ease monetary conditions by aggressive Quantitative Easing programs in an attempt to stimulate credit growth and ward off deflationary pressures.    

Key Market Themes

US Federal Reserve softens its tone on interest rates

Following their 25bp increase in cash rates in December last year, the market had expected the US Federal Reserve to gradually increase the Fed funds rate in four separate 25bp moves over the course of the year. While US employment and retail sales data have been healthy, the deterioration in the global economic outlook has resulted in the Fed softening its stance on future rate rises. In her testimony to Congress during the month, Fed Chairperson Janet Yellen adopted a much more dovish tone highlighting concerns about the global outlook centering around slowing activity in China, Japan and Europe as a factor restraining potential growth and inflation in the US. The “lower for longer” scenario buoyed the US share market which revised its expectation for rate rises to just two before year end. The $US weakened markedly as a result of the re-priced prospective interest rate differentials which will be welcomed by US manufacturing as tradable goods become more competitively priced.

Australian Dollar causing a headache for the RBA

After dipping below US 69 cents in January, the $A has risen sharply this year to finish the month at US 76.5 cents driven by the recovery in commodity prices especially iron ore. In addition to this, the dovish tone from the US Fed has led to a reassessment of the likely interest rate differentials with the US lending support for the local currency. The RBA would not be pleased to see the $A at current levels as it places pressure on them to cut official cash rates to offset the negative effect of the stronger currency. Industries such as education, tourism and manufacturing have been given a major boost from the depreciation of the $A and will not be helped by its reversal of fortune.

An unwelcome comeback

The Australian Federal Government announced that is was in no hurry to repair the budget deficit by substantial spending cuts or tax increases, preferring to focus on generating economic growth and relying on higher revenue receipts to correct the imbalance. With major tax reform also taken off the table, it will be interesting to see the composition of their May election year budget.

Show me the earnings

The reporting season for US first quarter earnings commences on April 11th and will be closely scrutinized by the market. Investors will be dissecting the composition of earnings results especially the revenue line as a barometer for the health of the US economy. Analyst expectations for Q1 are for earnings to decline by around 10%, the 3rd consecutive quarterly decline. While lower energy prices and the strong $US are the main culprits for this outcome, companies exposed to consumer discretionary spending are expected to grow by around 9%. Easy monetary policy has been a tonic for US shares in recent times but any significant advance from here will rely on earnings growth to be delivered. Companies that fail to meet the market’s expectations are sure to be heavily punished. Outlook statements from company executives will also be closely watched as will company buyback intentions, a strong support to the market in recent years. 

Investment Outlook

After a wild ride in the March quarter, share markets are more or less back to where they began the year. Very easy liquidity conditions continue to fuel equity markets and subdue bond yields. The key focus will continue to be the health of the US economy which is supporting a global economy weighed down by sluggish activity in Europe, China and Japan. Any signs that US personal consumption is beginning to wane will be a major concern to the share market. To this end, retail and auto sales data will be closely watched early in April.

While the investment equation for equities is finely balanced, bond markets offer security and diversification benefits but very little value at historically low bond yields. While very easy monetary conditions will prevent any sharp spike in yields, we prefer the higher running yield available from investment grade corporate bonds, hybrid securities and fully franked Australian dividends.


The strong recovery in commodities seen this year is likely to be short lived. With excess supply still evident in energy and bulk commodity markets, subdued demand conditions will limit the extent of any rise from here.

In currency markets, the $A could well continue to rally a bit further but its advance will ultimately be limited by the eventual narrowing of interest rate differentials with the US and still sluggish commodity prices.

By Gary Burke
Chief Investment Officer